Business Guide Russia
Danske Bank
Mannheimer Swartling
8th Edition
Preface
“Business Guide Russia” is intended as a preliminary exploration of the questions that typically arise when a company
wishes to enter the Russian market.
This guide has been edited in cooperation between Danske Bank and Mannheimer Swartling.
The guide is not intended to cover all issues arising in relation to activities in Russia. However, we hope that it will
provide an overview of typical issues.
Independent professional advisory services of a legal, fiscal, financial or marketing nature are indispensable and
usually a good investment.
Danske Bank and Mannheimer Swartling cannot be held liable for any misinterpretation of the information presented
in this guide.
The guide will be featured on the following Web sites, which will be updated regularly: www.danskebank.com,
www.danskebank.ru and www.mannheimerswartling.com.
April 2016
Danske Bank
Danske Bank is a Nordic universal bank with Denmark, Norway, Sweden and Finland as core markets.
Beside the Nordic countries Danske Bank has offices in London, Dublin, Hamburg, USA, Poland, Ireland, Northern
Ireland, Luxembourg, Baltic countries and Russia.
The history of Danske Bank Group dates back to 1871.
Danske Bank shares are listed on NASDAQ OMX Copenhagen and are included in a number of Danish and
international share indices.
For more information about Danske Bank go to www.danskebank.com.
In Russia Danske Bank is present since 2007 as a 100% Danske Bank A/S owned subsidiary.
Danske Russia offers wide range of cash management, treasury and financing products for corporate clients
of Danske Bank Group. Located in Moscow and St. Petersburg, the Bank operates in several geographic areas
of Russia, has about 50 employees and is licensed for all banking operations in all currencies. The Bank is a
member of the federal deposit insurance system.
Danske Russia maintains the highest possible international rating in Russia: BBB- Negative (by Fitch).
Danske Russia has a high level of management and operational integration with its parent company – Danske
Bank A/S.
For more information about Danske Bank Russia go to www.danskebank.ru.
Mannheimer Swartling
Mannheimer Swartling is one of the leading law firms in Northern Europe. The firm is a full service Swedish law
firm with an extensive international practice. With around 400 lawyers in four Swedish offices and seven offices
outside Sweden (Frankfurt, Berlin, Moscow, Shanghai, Hong Kong, Brussels and New York), the firm provides legal
advice to many national and multi-national corporations, financial institutions and organizations. Mannheimer
Swartling consistently ranks at the top of relevant league tables and in independent rankings: Sweden Law Firm
of the Year, Chambers Europe Awards for Excellence 2009, 2011, 2012 and 2015; Swedish Law Firm of the
Year, IFLR, International Financial Law Review, 2005, 2006, 2007, 2008, 2010, 2012 and 2015; and the Law
firm of the year, Sweden – according to Who’s Who Legal Awards each year starting from 2006.
Mannheimer Swartling has a long history in Russia. The firm opened its first Russian office in 1990 and was the
first European law firm in what was then the Soviet Union. The firm’s Russian practice involves a broad range
of advisory and transactional work, including M&A and corporate/commercial, real estate, banking and finance,
arbitration and litigation, as well as competition, labour and migration and intellectual property. In Russia the firm
has a full-service office located in Moscow and employs around 16 Russian and foreign lawyers. The Russian
practice is fully integrated in the firm and benefits from the entire firm’s experience and expertise.
Mannheimer Swartling offers its clients high quality legal advice in all areas of business law and cross-border
transactions.
The firm’s Russian M&A and Corporate Practice group regularly acts for clients in relation to corporate
establishments, mergers and acquisitions including due diligence and drafting and negotiating of transaction
documents, corporate restructurings and winding up of companies.
The firm’s Russian Real Estate Practice group advises on real estate transactions with regard to transaction
structures, due diligence, public filings and registration and assist in construction projects as well as commercial
leases. The firm is also experienced in advising both operators and owners in connection with the construction
and management of hotels.
The firm’s Russian Banking & Finance Practice group covers all areas of financing such as corporate lending,
acquisition finance, project finance, export financing, asset-backed finance, real estate financing, regulatory
issues and structured finance.
The firm’s Russian Litigation & Arbitration group acts as counsel or arbitrators in international disputes referred
to the Arbitration Institute of the Stockholm Chamber of Commerce, the International Chamber of Commerce and
the Commercial Arbitration Court at the Russian Federation Chamber of Commerce and Industry. In addition,
the group is one of few international law firms that handle court cases in Russian courts.
For further information go to www.mannheimerswartling.com.
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Contents
Danske Bank 
Mannheimer Swartling 
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Chapter 1  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facts about Russia 
1.1 Overview 
1.1.1 Prospects for the Russian economy 
1.1.2 Facts 
1.1.2.1 Political system 
Official name 
Form of government 
Parliament 
Head of state 
Central bank 
International relations 
1.1.2.2 Economic indicators and demographics 
Economic and social indicators 
Religion 
Languages 
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Chapter 2  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Judicial system  
2.1 The court system 
2.2 The commercial (arbitrazhniy) courts 
2.3 Russian courts in practice  
2.4 International commercial arbitration in Russia 
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Chapter 3  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
Setting up a business in Russia  
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3.1 Legal forms 
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3.2 Engaging an individual 
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3.2.1 Income tax payments and social fees  
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3.2.2 Office space and office equipment 
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3.2.3 Tax registration and risk of creation of a
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permanent establishment 
3.3 Representative office and branch  
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3.3.1 Representative office  
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3.3.2 Branch office  
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3.3.3 Accreditation of representative offices and
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branch offices  
3.4 Company 
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3.4.1 Limited liability company (OOO)  
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3.4.1.1 Company structure and funds 
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3.4.1.2 Rights and obligations of participants 
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3.4.1.3 Transactions with participatory interests   11
3.4.1.4 Management bodies 
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3.4.1.5 Annual reports and audit 
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3.4.2 Joint stock companies (AOs) 
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3.4.2.1 Establishment and share capital 
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3.4.2.2 Rights and obligations of shareholders 
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3.4.2.3 Management bodies 
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3.4.2.4 Audits and disclosure 
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3.4.2.5 Share-capital increase 
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3.4.3 Procedure for establishing an OOO and AO   13
Chapter 4  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Competition 
4.1 Overview 
4.2 Establishment, merger and acquisition of
companies, joint ventures 
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4.2.1 Pre-closing approval of mergers and
acquisitions 
4.2.2 Pre-closing approval of establishments 
4.2.3 Pre-closing approval of joint venture
agreements 
4.2.4 Post-closing notification 
4.3 Application review terms 
4.4 Intra-group transactions 
4.5 Foreign-to-foreign transactions 
4.6 Abuse of dominant position 
4.7 Prohibition of cartels, agreements limiting
competition and concerted actions 
4.7.1 Cartels 
4.7.2 Agreements limiting competition 
4.7.3 Concerted actions 
4.8 State aid 
4.9 Unfair competition 
4.10 Antimonopoly and competition control 
4.11 Sanctions 
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Chapter 5  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   17
Legislation on foreign investments in strategic
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sectors 
5.1 Overview 
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5.2 Russia’s strategic sectors 
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5.3 Foreign investors 
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5.4 Transactions covered by the Law 
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5.5 Definition of control 
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5.6 Special rules for foreign states and international
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organisations  
5.7 Procedures 
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5.7.1 Prior approval of acquisition of control 
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5.7.2 Obligations as a condition for approval 
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5.7.3 Post-closing request for approval  
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5.7.4 Post-closing notification 
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5.7.5 Sanctions for non-compliance 
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Chapter 6  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate 
6.1 Introduction 
6.2 Concept of real estate 
6.3 Russian real estate law 
6.4 State cadastral registration 
6.5 Categorisation of real estate  
6.6 Ownership to real estate 
6.7 Other rights to real estate 
6.7.1 Lease 
6.7.2 Servitude 
6.7.3 Gratuitous fixed-term use of land 
6.7.4 Operational management/financial
administration  
6.8 Expropriation of private real estate 
6.9 State registration of rights to real estate 
6.10 Acquisition of ownership title to real estate 
6.10.1 General 
6.10.2 Change of ownership 
6.10.3 Form of agreements 
6.10.4 Language requirements 
6.10.5 Due diligence 
6.10.6 Related costs 
6.10.7 Currency regulations 
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6.10.8 Construction 
6.11 Taxation 
6.12 Encumbrances 
6.12.1 Easements 
6.12.2 Mortgages 
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Chapter 7  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   24
Work authorization and immigration procedures    24
7.1 General 
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7.1.1 Visa requirements and visa types 
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7.1.2 Business visa 
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7.1.3 Work visa 
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7.2 Employment - related documents: quota placement,
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employment and work permit, patents 
7.2.1 General 
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7.2.2 Quota placement 
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7.2.3 Employment permit 
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7.2.4 Work permit  
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7.2.5 Patents 
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7.3 Highly-qualified specialists  
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7.4 “Key Personnel” 
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7.5 Additional immigration formalities: migration card,
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notification on arrival 
7.5.1 Immigration card  
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7.5.2 Notification on arrival  
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Chapter 8  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxation 
8.1 General 
8.2 Corporate income taxation 
8.2.1 Corporate residence 
8.2.2 Branch income 
8.2.3 Income 
8.2.3.1 Capital gains  
8.2.3.2 Interest and dividends  
8.2.3.3 Foreign income  
8.2.3.4 Exchange gains and losses  
8.2.3.5 Transfer pricing 
8.2.4 Deductions 
8.2.4.1 General  
8.2.4.2 Loss carry forward 
8.2.4.3 Interest  
8.2.4.4 Insurance premiums  
8.2.4.5 R&D expenses  
8.2.4.6 Depreciation and amortization 
8.2.4.7 Payments to foreign affiliates  
8.2.5 Tax consolidation  
8.2.6 Tax incentives 
8.2.7 Tax accounting  
8.2.8 Withholding taxes 
8.2.9 Tax administration 
8.2.9.1 Returns and payments  
8.2.9.2 Filing  
8.3 Other corporate taxes 
8.3.1 Property tax 
8.3.2 Transport tax  
8.4 Individual taxation 
8.4.1 Territoriality and residence  
8.4.2 Gross income  
8.4.2.1 Employment income  
8.4.2.2 Capital gains  
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8.4.2.3 Other taxable income  
8.4.2.4 Non-taxable income  
8.4.3 Deductions 
8.4.4 Tax credits 
8.4.5 Tax rates  
8.4.6 Exchange rates 
8.4.7 Tax administration: Returns and payment 
8.4.8 Other taxes and contributions 
8.4.8.1 Social insurance contributions 
8.4.8.2 Property tax on individuals 
8.4.8.3 Transport tax  
8.5 Value added tax  
Chapter 9  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Banking environment 
9.1 Overview 
9.2 The Central Bank 
9.3 Danske Bank in Russia 
9.4 Legal & regulatory issues 
9.4.1 Introduction 
9.4.2 Resident and non-resident status 
9.4.3 Account ownership 
9.4.4 Deposit insurance system 
9.4.5 Cash pooling solutions 
9.4.6 Account charges 
9.4.7 Currency control 
9.4.8 Money laundering prevention 
9.4.9 Electronic transaction regulations 
9.5 Payments and collection 
9.5.1 Introduction 
9.5.2 Card payments 
9.5.3 Credit transfers 
9.5.4 Direct debits, L/C’s and other means 
9.5.5 Cheques 
9.6 Electronic banking 
9.6.1 E-banking 
9.6.2 Other solutions 
9.6.3 E-payments 
9.6.4 E-invoice / EBPP 
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Chapter 10  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   39
Useful Links 
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Chapter 1
1
Facts about Russia
1.1 Overview
Russia is the largest country in the world by total area
(17.1 m sq.km), covering more than a ninth of the
Earth’s land area. It has the world’s largest energy,
mineral and forest reserves. With its wide base of
natural resources, a population of 146.3 million people
and almost unlimited infrastructural needs, Russia is
an attractive market for foreign energy companies,
producers and exporters of different goods and
technologies.
Russia is a high-income economy with state ownership
in strategic areas. Based on GDP estimates derived
from purchasing power parity (PPP) calculations,
Russia’s economy is the 6th largest with about
3.3% share in world economy. Russian economy is
excessively dependent on oil and gas exports.
Despite current uncertainty arising from geopolitical
standoff between Western countries and Russia,
many international companies consider Russia as
a prospective consumer market set for long-term
growth and thus market of their strategic business
interests.
1.1.1 Prospects for the Russian economy
Following breakdown of the Soviet Union in 1991
and economic crisis of the late 1990s, Russia was
one of the world’s fastest growing major economies,
mainly driven by windfall oil revenues and substantial
inflow of foreign investments. However, after 2008
- 2009 economic crisis and substantial 7.8% GDP
contraction in 2009, starting 2011 - 2012 economic
growth decelerated to very low levels and slowed to
0.6% y/y in 2014 from 1.3% in 2013.
GDP has been contracted by 3.8% in 2015 due to
combination of sharp drop in oil price, sanctions,
substantial monetary contraction and accelerated
inflation (12.9%). The forecast for 2016 is from -2%
to 0%.
In January 2015 Russia’s sovereign rating was cut
from BBB- to BB+ by S&P, in February also Moody’s
downgraded Russia to Ba1. One of the explanations
behind Moody’s downgrade was that “the continuing
crisis in Ukraine and the recent oil price and exchange
rate shocks will further undermine Russia’s economic
strength and medium-term growth prospects, despite
the fiscal and monetary policy responses.” Fitch rating
remains BBB-.
Russia has low public debt and relatively large currency
reserves. However, should oil prices stay at low level,
Russia risks facing economic contraction for a longer
time. A significant part of Russia’s reserves may go to
committed projects and to a large extent to support
repayments of sizable foreign debt of state-owned
companies and banks.
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1.1.2 Facts
1.1.2.1 Political system
Official name
Russian Federation (founded as an independent state
following the dissolution of the Soviet Union in 1991).
Form of government
Federal presidential-parliamentary republic
Parliament
Bicameral system: the Federal Assembly of Russia,
which consists of the Federation Council (upper house)
and the State Duma (lower house)
Head of state
The president is the head of state, supreme commanderin-chief and holder of the highest office. The president
is elected for a six-year term. The constitution of Russia
restricts the period during which a person can hold the
office to two consequent terms, although there is no
limit to the total number of years.
Central bank
The Central Bank of the Russian Federation (Bank
of Russia or CBR) is responsible for monetary and
exchange rate policies, the stability and supervision
of the banking system as well as the financial market,
including insurance and brokerage.
International relations
Russia is a permanent member of the United Nations
Security Council, a member of the G20, WTO, the
Council of Europe and the OSCE.
1.1.2.2 Economic indicators and demographics
Economic and social indicators
GDP: USD 3.56 trillion (on PPP, 2014), 6th largest
GDP per capita (PPP) USD 24’114, 44th place in the
world
Foreign reserves: BUSD 379 (March, 2016)
Inward FDI stock: BUSD 379 (2014, UNCTAD)
Ratings: BB+ Neg (S&P), Ba1 Neg (Moody’s), BBB- Neg
(Fitch)
Overall fertility rate: 1.777 children born per woman
(2015)
Life expectancy: total population: 71 year; male - 65;
female - 76 (2014, state statistics)
Religion
Russian Orthodox 75%, other Christian 2%, Muslim
10-15%
Languages
Russian, many minority languages.
Chapter 2
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Judicial system
2.1 The court system
The Russian court system consists of several types
of courts. On federal level it is comprised by the
Constitutional Court, the federal courts of general
jurisdiction and the commercial (arbitrazhniy) courts.
On the level of the regions of the Russian Federation (its
constitutive parts, such as, for example, Tatarstan or
Krasnodarskiy krai), the system includes constitutional
courts of the regions and local courts.
The Constitutional Court of the Russian Federation
exercises constitutional control, i.e. resolves issues
of compliance of federal and regional legislation, as
well as decisions of intergovernmental bodies for
the protection of human rights (such as, for example,
judgments of the European Court of Human Rights)
with the Constitution of the Russian Federation, and
disputes between federal authorities and authorities of
the regions of the Russian Federation. It also interprets
the Constitution. Regions of the Russian Federation
may have their own constitutional courts that resolve
issues of compliance of regional legislation with the
fundamental laws of the regions.
Federal and local courts of general jurisdiction hear
a wide range of criminal and civil cases as well as
labor and administrative cases involving private
individuals. The Code of Civil Procedure, the Code of
Administrative Procedure and the Code of Criminal
Procedure regulate the procedure in courts of general
jurisdiction.
The commercial (arbitrazhniy) courts resolve
commercial disputes that arise between legal entities,
their shareholders or registered entrepreneurs and
administrative disputes between companies, their
shareholders or registered entrepreneurs and state
authorities. The system of commercial (arbitrazhniy)
courts also includes special court for intellectual
property rights.
In 2014 the Higher Commercial (Arbitrazhniy) Court of
the Russian Federation and the Supreme Court of the
Russian Federation were merged into a single judiciary
body – the Supreme Court of the Russian Federation.
2.2 The commercial (arbitrazhniy) courts
The commercial (arbitrazhniy) courts derive their
names from Soviet times when disputes between state
enterprises were heard before the “state arbitration”.
Despite their name, these courts have nothing
in common with arbitration courts or arbitration
institutions where parties resolve their disputes before
a panel of arbitrators which they choose themselves.
Commercial (arbitrazhniy) courts are state courts
which specialize in resolving property, commercial
and administrative disputes between legal entities
and registered entrepreneurs. They also examine
claims seeking to invalidate governmental acts
allegedly violating rights and legitimate interests
of registered entrepreneurs or legal entities. Such
claims include tax, land and other disputes arising out
of administrative, financial and other legal relations.
Commercial (arbitrazhniy) courts also hear disputes
that involve foreign legal entities or citizens.
Rules of procedure in commercial (arbitrazhniy)
courts are different, albeit with a certain tendency to
harmonization, from procedural rules that apply to
civil cases heard in courts of general jurisdiction: in
commercial (arbitrazhniy) courts, the Code of Arbitrazh
Procedure applies.
The system of commercial (arbitrazhniy) courts
operates at four levels. The first level consists of the
federal commercial (arbitrazhniy) courts that act as
courts of first instance.
The second level has 21 commercial (arbitrazhniy)
appellate courts. The commercial (arbitrazhniy)
appellate courts fully re-examine cases with respect to
matters of both fact and law.
The third level comprises ten circuit commercial
(arbitrazhniy) courts. Each of them functions as a court
of cassation dealing only with cases involving wrongful
application of procedural and substantive law.
In 2013 special court for intellectual property rights
was established. The court for intellectual property
rights has jurisdiction over certain disputes related
to intellectual property rights as the court of the first
level (for instance, disputes regarding ownership of
patents). This court also acts as the third level court
(cassation instance) with regard to the decisions on
intellectual property rights issued by commercial
(arbitrazhniy) courts.
In 2014 the Higher Commercial (Arbitrazhniy) Court
of the Russian Federation, which was the fourth level
and the superior judicial body for deciding commercial
disputes and other cases handled by the commercial
(arbitrazhniy) courts, was merged with the Supreme
Court of the Russian Federation and ceased to exist.
All commercial disputes, which previously were
subject to the jurisdiction of the Higher Commercial
(Arbitrazhniy) Court, are currently considered by
the Supreme Court of the Russian Federation: by
the Judicial Division for Economic Disputes of the
Supreme Court (second cassation instance) and then
by the Presidium of the Supreme Court of the Russian
Federation (supervisory instance). The Supreme
Court also supervises the commercial (arbitrazhniy)
courts and gives clarifications of court practice. The
resolutions of the Higher Commercial (Arbitrazhniy)
Court, issued prior to the courts’ merger in 2014,
which set guidelines on application of law by the courts
continue to stay in force until the Supreme Court of the
Russian Federation issues its own resolutions on the
same topics. Other decisions of the Higher Commercial
(Arbitrazhniy) Court also stay if force insofar as they
do not come in conflict with the current practice of the
Supreme Court.
Historically, the rules of civil procedure in Russia
have been inquisitorial (i.e. provided for the court’s
active participation in investigation of facts and
even empowered the courts to collect evidences at
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own initiative) as the rules of other continental law
jurisdiction and not adversarial (where a judge takes
a decision following each party’s presentation of its
position). However, the Code of Arbitrazh Procedure,
adopted in 2002, significantly limited the power of the
commercial (arbitrazhniy) courts to collect evidence
independently of the parties’ initiative, thus taking the
procedure in a more adversarial direction.
In contrast with the courts of general jurisdiction, the
commercial (arbitrazhniy) courts tend to rely primarily
on documentary evidence rather than on witness
statements.
One of the main advantages of the commercial
(arbitrazhniy) courts is a relatively short time for
proceedings. The law provides for a three-month period
starting with the receipt of the statement of claim and
ending with the rendering of a judgment. This period is
in practice usually longer, but rarely exceeds one year.
2.3 Russian courts in practice
While every national court system has its own
characteristics, the Russian court system works
differently from courts in the western jurisdictions.
Russian courts operate within the framework of the
Russian society, and the limitations of the Russian
administration are mirrored in the working of the
courts. Leaving aside political and economic factors,
some specific features of the Russian court system
deserve to be mentioned.
First, it is important to bear in mind that many Russian
judges certainly match the professional standards
of their western peers, but others, notably those
trained in a different time under a different regime,
may be less familiar with many of the principles
that characterize a nation under the rule of law. One
obvious trait among many Russian judges is their
tendency to apply statutes and contractual provision
literally, even in situations where the result will appear
at odds with what reasonably was the intention of
the parties. Arguments related to the purpose and
systematics of statutes or contractual provisions will
usually be trumped by a literal interpretation of the
wording. Therefore, it is advisable to explicitly state
in an agreement all contractual obligations and not to
rely on a general duty of the parties to do everything
to fulfill their contractual claims. Otherwise, it may be
difficult to succeed in a law suit for violation of implied
obligations.
While court proceedings in all countries have a
tendency to be conducted by the parties like a chess
game, this is even more so the case in Russia: the
parties usually send their briefs only three days before
a hearing, and distribution of briefs to the parties by
courts is not common. Judges may have 20-30 cases
to prepare for a hearing day and may choose not to
take into account lengthy arguments that are not easy
to explain.
When deciding to litigate in Russia, it is important to
know whether the litigation will take place in Moscow,
St. Petersburg or in other regions. In the latter case, a
lower level of legal professionalism may be expected,
and judges in such cases have a tendency to side with
6
more formalistic arguments. Also, suing the main
employer in a region may lead the court to take into
account non-legal considerations in its decision. In
addition, Russian court practice with respect to the
same issue may vary from region to region.
During a long period of time Russian courts were
reluctant to award reimbursement of legal costs of the
winning party at the expense of the losing party. Even if
the courts had decided to award such a reimbursement,
the amount of compensation would usually be far
lower than the actual legal costs. However, during
the recent years, Russian courts have changed this
approach and issued a number of decisions where
legal costs were compensated to the winning party in
full or in a substantial part. The practice varies from
region to region and chances to receive a considerable
compensation of legal costs in Moscow courts are
higher than in the courts of the Russian regions.
In short, while achieving justice in Russian courts
is possible, there are obstacles that do not exist in
western jurisdictions. But the picture is not as bleak as
is commonly asserted – for example, the majority of the
claims made against tax authorities are successful.
2.4 International commercial arbitration in Russia
In Russia, as in many other jurisdictions, the parties may
refer their commercial disputes to ad-hoc arbitration
or arbitration institutes located in or outside Russia as
an alternative to the state commercial (arbitrazhniy)
courts.
Russia is a party to the 1958 New York Convention
on Recognition and Enforcement of Foreign Arbitral
Awards (the New York Convention). Under the
convention, foreign arbitral awards can be enforced in
Russia, while arbitral awards rendered in Russia can
be enforced in other states that are parties to the New
York Convention.
Russia is a party to many bilateral investment treaties
under which investment disputes can be referred to
arbitration.
Russia is also a party to the European Convention on
International Commercial Arbitration of 1961.
The Russian Law on International Commercial
Arbitration of 7 July 1993 is based on the Model
UNCITRAL Law.
Russia is currently undergoing an arbitration reform
which is aimed at encouraging development of
arbitration in Russia and preventing its use for abusive
purposes. Its overall effect remains to be seen. Most
importantly, new arbitration laws recognize arbitrability
of most corporate disputes, although subject to
significant limitations (for example, provided that an
underlying arbitration agreement is entered into not
earlier than 1 February 2017), and introduce stringent
rules for arbitration institutes. The new arbitration
laws should be considered when drafting an arbitration
agreement and contemplating enforcement of an
arbitral award in Russia. Most of the new provisions
will enter into force on 1 September 2016.
Russia’s leading arbitration institute is the
International Commercial Arbitration Court at the
Russian Federation Chamber of Commerce and
Industry (the ICAC). The ICAC is a popular venue for
resolving disputes among Russian, CIS and Eastern
European companies (in 2015 the ICAC considered
316 cases). Another popular arbitration forum among
Russian companies is the Arbitration Institute of the
Stockholm Chamber of Commerce, which historically
was the venue for resolving disputes between the
Soviet Union and its foreign trade partners. In 2014
a new arbitration institute – the Russian Arbitration
Association – was established.
Arbitrability of disputes is a contradictory issue
in Russian law. In the absence of clear regulation,
Russian courts assumed control over this matter and,
when deciding particular cases, held certain types of
disputes (such as, for example, public procurement
and corporate disputes) to be non-arbitrable. The
ongoing arbitration reform attempts to eliminate
this uncertainty by stipulating that disputes are nonarbitrable only if the federal laws expressly provide so.
In accordance with the provisions of the revised Code
of Arbitrazh Procedure, which will enter into force on
1 September 2016, non-arbitrable disputes include,
among others, the following:
• Insolvency cases;
• Certain disputes on protection of intellectual
property rights;
• Certain corporate disputes (for example, disputes
in connection with mandatory offer or with respect
to the so-called “strategic” legal entities);
• Disputes related to privatization of state or
municipal property;
• Disputes related to public procurement.
In practice, this means that even if a party to a dispute
has an award rendered in its favour in arbitration
abroad, the Russian courts may deny enforcement
stating that the dispute is non-arbitrable under Russian
law.
History is full of decisions by Russian courts denying
enforcement of foreign arbitral awards. Several of
these decisions were based on grounds that are not
in conformity with the general practice of courts
in western jurisdictions. In particular, there is no
consistency in the court practice with respect to
application of public policy as a ground for refusing
enforcement of foreign arbitral awards. However,
during the recent years, Russian courts have
been demonstrating rather friendly approach to
enforceability of foreign and domestic arbitral awards.
Chapter 3
3
Setting up a business in Russia
3.1 Legal forms
Generally, a foreign company has three options when
setting up a business in Russia1:
• Engage a Russian individual to act for the foreign
company in Russia;
• Set up a representative office or a branch office in
Russia;
• Set up a Russian company (wholly owned or coowned with a Russian company or an individual).
The choice of strategy has both management and tax
implications, and while some entities, for example,
a representative office or a branch, may be a good
solution in the initial phase, they may not be suitable
or even legal as the foreign company wishes to expand
its business.
Below we set out an overview of legal requirements
relating to setting up a business in Russia. We note
that the Russian Civil law is still undergoing important
changes and the Russian Civil Code has been
significantly amended since 2013. The major changes
that came into force on 1 September 2014 related to
the regulation of legal entities, including forms of legal
entities, establishment and liquidation of legal entities,
management bodies of legal entities, corporate
agreements, liability of legal entities etc., and a number
of other issues, such as registration of rights, the
concept of abuse of rights, calculation of limitation
period, issuance and termination of a power of attorney,
changes in regulations on securities, pledge, etc. The
changes also affected Russian rules on international
private law and intellectual property rights. Further,
a set of amendments came in effect on 1 June 2015
and mostly affected the law of obligations. The most
recent amendments entered into force in January
2016 and according to these amendments the list
of documents and corporate resolutions subject to
mandatory notarization was significantly extended.
The amendments to the Russian Civil law are aimed
at improving Russian business environment and
encouraging investors to set up businesses in Russia,
as well as bringing the legal regulation of economic
relationships in line with evolving business needs.
3.2 Engaging an individual
The fastest way for a foreign company to start activities
in Russia without registering its presence with any
Russian authority and without having an office in
Russia is often simply to engage a Russian individual
as a consultant under a civil law (service) contract.
This is different from hiring a person as an employee of
a foreign company. (This is also legally possible without
1 The guide does not deal with other options, for example, establishing
contractual relations with a Russian partner (e.g. entering into a supply
or a distribution arrangement, or a license agreement involving transfer
of technology) or acquiring existing Russian business (whether through
a share deal or asset deal).
7
having an office in Russia but will trigger a number of
obligations under the Russian labour law as well as an
obligation to withhold and pay taxes and mandatory
social insurance contributions (“social fees”), and for
these reasons is usually not a good option.) A services
contract is governed by general civil law (either the
Russian law, or, in case of a foreign client, foreign law)
and not by the Russian labour law. In practice, this
means that the contracting parties are free to agree
on the terms as they wish. No mandatory rules of
the Russian labour law will apply to salary, overtime,
vacation or termination of the contract. It is advisable
that the services contract, to the extent possible, does
not contain provisions customary for an employment
contract, such as the contractor’s obligation to follow
the company’s employees regulations and policies,
details of working time and leisure time, etc.
Generally, the advice to a foreign company, which is
not maintaining a presence in Russia but wishes to
engage an individual who will provide his services to
the company, is to retain an individual under a civil law
(service) contract as a consultant rather than as an
employee. This will allow a great deal of flexibility in the
foreign company’s relations with the individual. It will
also allow the foreign company to avoid the mandatory
rules of Russian labour law. However, it is important
that the consultant is registered as an individual
entrepreneur for the reason described below.
3.2.1 Income tax payments and social fees
A company that engages a Russian person to perform
work in Russia would normally have to withhold and pay
income tax and social fees for that person. However,
if the individual engaged under a civil law (service)
contract has been registered with the Russian
authorities as an individual entrepreneur, the foreign
company does not need to make any withholdings
for taxes and social fees. Instead, the individual
entrepreneur must make these payments himself/
herself, and the company that engaged the individual
will not be liable for any amounts due. Obviously, it is
vital that a foreign company that engages a person as
an individual entrepreneur carefully checks that the
person is duly registered.
3.2.2 Office space and office equipment
Under the Russian law, a foreign company may rent
an office and maintain it even without setting up a
branch or a representative office. However, a better
solution in the initial phase is, if needed, to have the
Russian individual lease the office space and the office
equipment directly from the landlord and then for the
foreign company to reimburse the individual for the
lease payments. This will limit the exposure of the
company in Russia. Having the individual lease, the
office space and the equipment also has the advantage
of further reducing the risk that the individual will be
regarded as an employee and, thus, that he/she will
be covered by mandatory provisions of the Russian
labour law.
3.2.3 Tax registration and risk of creation of a
permanent establishment
There are certain legal aspects connected with
engaging an individual of which a foreign investor should
be aware. If an individual forms a so-called permanent
8
working place (i.e., an office or a desk existing longer
than one month), this may trigger an obligation for the
foreign company to register with the tax authorities.
This does not mean that the foreign company will need
to pay any taxes in Russia – as long as the company
does not form a so-called permanent establishment
(i.e. a Russian taxable presence), which may happen if
the individual starts representing the foreign company
in negotiations of commercial contracts and/or signs
such contracts on the company’s behalf.
Other activities, typical in a start-up phase of any
business, such as market studies and participation in
exhibitions on behalf of the foreign company will not
create any Russian tax liability for the foreign company.
3.3 Representative office and branch
While engaging an individual on a consultancy basis
may be a suitable first step into Russia, activities
on a larger scale or the need of a foreign investor to
show a more visible presence in Russia will require
registration of a representative office or a branch in
Russia, the two simplest and most common forms
of a registered presence. While they share many
characteristics, there are also a few differences
described below.
3.3.1 Representative office
A representative office is an office of a foreign
company established to perform support functions
for that foreign company. It is not a legal entity but a
subdivision of the foreign company that established
it. This means that the founder of the representative
office is fully liable for the debts and obligations of its
representative office in the same way as it is liable for
its own debts and obligations. A representative office
is entitled to carry out liaison and ancillary functions in
order to promote the business of the foreign company
that has set it up. It may engage in activities that involve
co-operation between Russian and foreign entities,
such as, for example, marketing and promotion.
Representative offices are not expected to engage
in commercial activities (such as production,
warehousing and export/import operations, etc.) or
generate profit, and, for this reason, are not subject
to profits tax unless their activities give rise to a
“permanent establishment” for tax purposes, which
may happen when a foreign company engages in
general commercial activity through its representative
office.
In reality, many representative offices do engage
in commercial activities, most often by rendering
consultancy services, but they are effectively barred
from activities which entail import or export of goods.
The Russian authorities have accepted this practice
for more than two decades on condition that these
representative offices pay all taxes associated
with their commercial activities. The tax rules for
a representative office carrying out commercial
activities are very similar to those that apply to a
Russian company. Tax regulations are described in
more detail in Chapter 8.
Representative offices may employ local and foreign
staff and rent office space. Representative offices
may open Russian bank accounts and use these
accounts for payments related to the activities of the
representative office.
A representative office of a foreign company must
be accredited by the relevant Russian authority, see
below under 3.3.3. The representative office must
also be registered with the tax authorities regardless
of whether it carries out commercial activities or not.
Representative offices that carry out commercial
activities keep a Russian permanent establishment
of the foreign company, which is, therefore, subject
to Russian corporate profits tax assessed on Russia
related proceeds.
3.3.2 Branch office
Just as the representative office, a branch office is a
subdivision of a foreign company in Russia. As such,
it does not constitute a juridical person; it is merely
a part of the foreign company that created it, which,
therefore, remains liable for the branch’s debts and
obligations. However, in contrast to the representative
office, a branch office may fulfill all or part of the
functions of its founder. These functions include, inter
alia, contracting with Russian entities with payments
in foreign currency and rubles carrying out sales and
other business activities.
As is the case with representative offices, a branch
office must keep accounts that accurately reflect its
financial activities. It must also be registered with the
Russian tax authorities whether or not the activities
are recognized as yielding taxable profit (income).
Branch offices that carry out commercial activities
form a Russian permanent establishment of the
foreign company which is, therefore, subject to Russian
corporate profits tax assessed on Russia related
proceeds.
3.3.3 Accreditation of representative
offices and branch offices
Starting from 1 January 2015 accreditation of
representative offices and branches is performed
by the Federal Tax Service of the Russian Federation
(the “FTS”). Accreditation of representative offices
and branches which carry out certain specific types
of activity (e.g. credit organizations) is performed
by the relevant authorities (e.g. the Central Bank of
Russia grants accreditation of representative offices
and branches of foreign banks and also registers such
representative offices and branches with the FTS).
The term of accreditation of representative offices and
branches newly accredited by the FTS after 1 April
2015 will be unlimited.
Foreign legal entities that want to establish a
representative office or a branch in Russia, must
provide a number of corporate documents, notarized
and apostilled in the country of execution. Any of the
documents provided for registration in a language
other than Russian must be provided with a Russian
translation which must have a notarized certification.
To become fully operative a representative office and
a branch office must carry out a post-accreditation
procedure, which includes obtaining registration
documents from the tax authorities, the State
Statistics Service and the Russian social security
funds.
3.4 Company
Most foreign entities that contemplate a permanent
presence in Russia and commercial activities of any
scale will eventually need to consider setting up a
company in Russia. One important factor is that a
company is often the only set-up that will allow the
founding legal entity to separate itself from the debts
and obligations incurred by its Russian business.
Starting form 1 September 2014 commercial
companies are divided into public and non-public
companies. A public company is a joint stock company
which shares and other securities convertible into
shares are placed through public offering or are
publicly traded or a company which charter and
corporate name state that the company is public.
All other companies that do not meet at least one of
the above criteria are non-public. Only a joint stock
company can be public.
The most popular types of companies for foreign
investors are the limited liability company (abbreviated
OOO) and the joint stock company (abbreviated AO),
which can take two forms: public joint stock company
and non-public joint stock company (previously joint
stock companies were divided into open and closed
joint stock companies). With a few exceptions, both the
limited liability company and the joint stock company
provide limited liability for the parent company,
meaning that the parent company (the shareholder
of a Russian company) is not liable for the debts and
obligations of the Russian limited liability company or
the joint stock company.
Limited liability companies and joint stock companies
may be founded in Russia by legal entities, such as
other companies, and/or individuals, irrespective
of nationality. A company may be established by one
single founder. No particular restrictions apply to
foreign founders. Under a peculiar provision of the
Russian law, a solely owned company (a wholly-owned
subsidiary of another company) may not itself be the
sole shareholder of a limited liability company or a joint
stock company.
The Russian company law also regulates the ratio
between a company’s charter capital and the book
value of its net assets. If at the end of the second
or any subsequent financial year the value of the
company’s net assets is lower than its charter capital,
the shareholders must either decrease the company’s
charter capital or liquidate the company.
The main differences of practical importance between
a limited liability company and a joint stock company
are the following:
• Establishment procedure: Establishment of an
OOO is less complicated as compared to the
establishment of a joint stock company, since the
OOO’s charter capital is not divided into shares,
but into “participatory interest”, and there is no
9
legal requirement to issue and register shares in
an OOO. An OOO can be registered before any part
of its charter capital is paid, however, the charter
capital of an OOO must be fully paid within four
months after the state registration of the company.
As regards an AO, no less than 75% of its charter
capital must be paid prior to its state registration
and the remaining part must be paid within one year
of the registration date;
• Right to withdraw from OOO: Unless otherwise
stated in the charter, a participant of an OOO may
withdraw from the company by requesting the OOO
to purchase its participatory interest at the price
pro rata to the value of OOO’s net assets;
• Capitalization: It is relatively easy to increase the
charter capital of an OOO and otherwise capitalize
an OOO, i.e., through contributions to the company’s
assets without increase of its charter capital, while
an increase of the charter capital of a joint stock
company is a complicated and time-consuming
procedure;
• Transfer of shares: Transfer of shares in joint stock
companies is not subject to notarization; such
transfer is recorded in the shareholders’ register.
All joint stock companies must entrust maintaining
of the shareholders’ register to an independent
licensed registrar. In a limited liability company,
transfer of participatory interest is subject to
certification by a Russian notary and is reflected in
the Unified State Register of Legal Entities (EGRUL)
(maintained by the tax inspectorate) and in the list of
participants maintained by the company;
• Closed membership: It may be provided in the
charter of an OOO that its participants are not
allowed to transfer their participatory interests to
third persons, whereas no such prohibition may
be included in the charter of a joint stock company
and their shareholders may always sell their
shares to third parties (however, a sale of shares
in a non-public AO may be subject to pre-emptive
rights of other shareholders and the company to
purchase shares from the selling shareholder, if
the company’s charter provides for such rights).
If the charter of an OOO prohibits a transfer of
the participatory interest to third persons, the
participants are entitled to request that the OOO
purchases their participatory interests at the price
pro rata to the value of OOO’s net assets;
• Decision-making procedures: The procedure for
convening and holding a general participant’s
meeting in an OOO is simpler than that in a joint
stock company. However, it is important to know
that in an OOO certain issues require a unanimous
voting of all participants in order to pass, which
may in certain cases lead to a dead-lock situation
and require a higher level of cooperation among the
participants of an OOO. This is an important issue
which should be considered when creating a joint
venture in the form of an OOO;
• Number of participants: The number of participants
of an OOO cannot exceed 50. An OOO with more
10
than 50 shareholders must be transformed into
joint stock company within one year or liquidated
in court, unless the number of its participants is
reduced;
• Expulsion from the company: Participants of an OOO
(and shareholders of a non-public AO) may apply to
a court, seeking the expulsion of another participant
(shareholder) which materially obstructs the
company’s operations or caused material damage
to the company.
As a rule of thumb, a limited liability company is a better
choice for a single shareholder that does not intend to
invite other persons to become shareholders of the
company and for formation of 50/50 joint ventures
with a Russian partner, while a joint stock company
may be preferred if there are several shareholders in
the company.
The two company forms are described in more detail
below.
3.4.1 Limited liability company (OOO)
A Russian limited liability company has its equivalent
in many European countries, for example GmbH in
Germany, SARL in France and ApS (Anpartsselskab)
in Denmark. Continental European laws on limited
liability companies also seem to have served as a
model for Russia. OOOs are regulated by a number of
sections of the Russian Civil Code and in more detail
by the Federal Law On Limited Liability Companies No.
14-FZ dated 8 February 1998 (the “LLC Law”).
The participants of an OOO (and the OOO itself, if
provided for in its charter) have pre-emptive rights,
meaning that a participant who wishes to sell its
participatory interest or a part of it to a third party will
have to first offer it to other participants and the OOO,
if applicable. However, if the participatory interest is
transferred under a transaction other than sale (e.g.,
donation, swap, contribution to the charter capital of
another company, etc.), other shareholders and the
OOO do not have any pre-emptive right to acquire the
participatory interest thus transferred.
An OOO cannot be listed on a stock exchange. (However,
it may issue and list corporate bonds on any of the
Russian stock exchanges).
3.4.1.1 Company structure and funds
The participants of an OOO may be both individuals and
legal entities. The number of participants may range
between 1 and 50.
The company’s charter capital must be at least RUB
10’000, this statutory minimal amount must be paid
in cash. The contributions to the charter capital of an
OOO exceeding the statutory minimal amount may
be paid in cash or by contribution in kind, such as
machinery or other equipment. If the nominal value
of the participatory interest is paid by an in-kind
contribution, the value of assets must be determined by
an independent appraiser. The participants of the OOO
may not approve evaluation of in-kind contributions to
the OOO’s charter capital in the amount exceeding the
evaluation determined by the independent appraiser.
As noted above, it is not necessary for an OOO to pay
the charter capital before registration, but the charter
capital must be fully paid up within four months of
the OOO’s registration. Before the charter capital of
the newly-established OOO has been paid in full, its
participants are subsidiarily liable for the obligations
of the OOO.
3.4.1.2 Rights and obligations of participants
Participants in a limited liability company are not
liable for the company’s debts (except for a few cases
specified by the law). Participants of limited liability
companies have the following general rights and
obligations:
• Participate in the management of the company in
accordance with the LLC Law and the company’s
charter;
• Sell or otherwise assign their participatory
interest in the charter capital or a part thereof, to
one or more of the participants of the company in
accordance with the procedure established by the
LLC Law and the charter;
• Receive distributed
(dividends);
profit
of
the
company
• Receive a part of liquidation proceeds in the case of
liquidation of the company;
• Initiate proceedings in court to exclude another
participant who significantly obstructs the
company’s operations or caused material damage
to the company;
• If an OOO has several participants, a participant
may withdraw from the company if such option is
provided by the charter or require OOO to buy its
participatory interest;
• Participants must refrain from any actions
knowingly aimed at causing harm to the OOO or from
any actions or omissions to act which significantly
obstruct or prevent the company from achieving
the purposes for which the company was created;
• Participants may enter into a so-called agreement
on participants’ rights (a remote analogue
of a shareholders’ agreement). Agreement
on participants’ rights may determine voting
procedure at general meetings, price and other
terms and conditions of sale of a participatory
interest and other issues related to the procedure
of exercising rights and obligations of participants.
The Russian Civil Code expressly allows for
choosing non-Russian law as the governing law of
agreements on participants’ rights provided that at
least one of the parties is a foreign person, but the
mandatory rules of Russian law still apply to certain
issues, such as the matters of establishment and
legal capacity of a company, “internal relations”
including the relationship between the company
and its participants, the participants’ liability, etc.
However, it should be noted that when it comes to
resolution of disputes arising out of the agreements
on participants’ rights, Russian courts interpret the
law in the way that only Russian state commercial
courts have jurisdiction over such disputes and
they may not be transferred to international
arbitration. The OOO itself still cannot be a party
to an agreement on participants’ rights and does
not need to be aware of its contents, but it must
be notified of the existence of such an agreement.
We note that in the absence of any significant court
practice the enforceability of certain provisions of
agreements on participants’ rights is still unclear.
The participants in an OOO also have other rights
and obligations provided by the LLC Law, and may
have additional rights and obligations set forth in the
charter.
3.4.1.3 Transactions with participatory interests
A participant may sell or otherwise dispose of its
participatory interest or a part thereof to other
participants. In this case the consent of other
participants is not required, unless otherwise provided
by the company’s charter.
A participant who wishes to sell its participatory
interest (or a part of it) in the company to a third party
has to offer it to other participants before selling it
to a third party. The offer price for other participants
may be indicated in the charter of the company and it
remains unchanged regardless of the price offered by
any third parties. As of January 2016 an offer as well
as a refusal to exercise the preemptive right to buy the
participatory interest (or a part of it) specified in the
offer must be notarized.
Any disposal of participatory interest is subject to
notarization and agreement regarding the sale of
participatory interest becomes valid only upon its
certification by a Russian notary. Title to participatory
interest is deemed transferred upon registration in the
EGRUL.
Participants may pledge their participatory interest
to other participants or, if this is not prohibited by
the company’s charter, to third parties. The pledge
agreement is also subject to notarization. A pledge of a
participatory interest (or a part of it) is subject to state
registration and will become effective only upon such
registration.
3.4.1.4 Management bodies
The management bodies of a limited liability company
are the participants’ meeting, the board of directors
(or the supervisory board) and the executive body
(either a CEO or, rarely, a CEO and a collegial executive
body). Starting from 1 September 2014, the powers
of the sole executive body may be performed by
several persons acting either jointly, or independently.
The board of directors is not mandatory and many
founders conclude that, from a management point of
view, a board of directors is not practical. Most OOOs
have only the participants’ meeting and the CEO as
management bodies.
The participants’ meeting is the company’s supreme
decision-making body. The ordinary general
participants’ meeting must be held at least once a year,
but not earlier than two months before and not later
11
than four months after the completion of the financial
year. Participants holding at least 10% of the charter
capital, the CEO, the board of directors, the company’s
internal auditor and its external auditor may initiate
convening of the extraordinary participants’ meetings.
The extraordinary general participants’ meetings may
be held in the form of absentee voting. The statutory
powers of the general participants’ meeting cannot
be assigned to the board of directors or to the CEO
(unless this is specifically provided for by the LLC
Law), however the powers on certain issues may be
expanded by the company’s charter.
The number of the board of directors’ members is
unlimited. The competence of the board of directors is
outlined in the LLC Law and may be amended, within
the limits permitted by the LLC Law.
The CEO is elected by the participants’ meeting (unless
the company’s charter requires that this decision to
be made by the board of directors). The CEO is solely,
or together with the collegial executive body, if any,
responsible for the day-to-day business of the company.
The CEO has the power to take all decisions in relation
to the company, except for those specifically attributed
to the general meeting of participants and the board
of directors. The CEO acts on behalf of the company
without power of attorney and is the authorized
signatory of the company. Members of the board of
directors are not authorized to sign on behalf of the
company unless the CEO issues a Power of Attorney
to them. The CEO may authorize other persons to
sign for the company pursuant to a Power of Attorney.
The functions of the CEO may also be delegated to a
management company.
3.4.1.5 Annual reports and audit
Limited liability companies are generally not subject to
mandatory external audits (exceptions apply to certain
companies such as banks, finance and insurance
companies).
Book-keeping and accounting in a limited liability
company generally are carried out by the chief
accountant. After the CEO, the chief accountant
is formally the most important person in an OOO.
A foreign company wishing to establish a limited
liability company in Russia should, therefore, find a
chief accountant as early as possible, and preferably
before the company is registered. Book-keeping and
accounting may be outsourced as well.
3.4.2 Joint stock companies (AOs)
Russian joint stock companies currently may have
the form of “public” or “non-public” companies. These
forms generally correspond to the types of private
and public joint stock companies that exist in many
European countries. A public company is a joint-stock
company which shares and securities convertible into
shares are placed through public offering or publicly
traded; or a company which charter and corporate
name contain indication statement that the company
is public. All other companies that do not meet at least
one of the above criteria are considered to be nonpublic. Similarly to many other jurisdictions, public
AOs are subject to stricter statutory requirements.
12
The shareholders of a public AO are always free to
sell their shares to a third party without first offering
them to other shareholders of the company. In a nonpublic AO the shareholders and the company itself
may have a pre-emptive right to buy the shares offered
for sale to a third party, in which case a record about
the existence the pre-emptive right must be made in
the AO’s charter. The large majority of Russian joint
stock companies are non-public, and unless special
considerations, such as a plan for a company to carry
out an IPO, exist, there is very rarely any reason for a
private foreign investor to establish a public joint stock
company (whether wholly-owned or as a joint venture).
This section will, therefore, deal only with non-public
joint stock companies.
Joint stock companies are governed mainly by the
Russian Civil Code and the Federal Law On Joint Stock
Companies No. 208-FZ dated 26 December 1995
(the “JSC Law”).
3.4.2.1 Establishment and share capital
An AO may be established and owned by both
individuals and legal entities
The JSC Law provides for the statutory minimal
amounts of charter capital of AOs: RUB 100’000 for
public AOs and RUB 10’000 for non-public AOs. This
statutory minimal share capital must be paid in cash.
The share capital exceeding the statutory minimal
amount may be paid in cash, securities or through
contribution in kind. At the formation of the company,
the shareholders themselves may agree on the value
of the assets contributed in kind but such value cannot
be set higher than what has been determined by an
independent appraiser. The value of additional in
kind contributions may be determined by the board
of directors or the shareholders’ meeting but, again,
cannot be higher than that determined by an appraiser.
As noted above, at least 75% of AO’s share capital
must be paid prior to the registration of the company
and the remaining part must be paid within one year
after the registration.
The information on the company’s shareholders must
be reflected in the shareholders’ register which must
be maintained by an independent licensed registrar.
The shareholders’ register shall reflect, inter alia,
the current number of the shareholders and the
distribution of shares by number and category.
A non-public AO may issue public non-convertible
securities other than shares (bonds, etc.). Such
securities must be registered with the Central Bank
of Russia.
3.4.2.2 Rights and obligations of shareholders
The shares of an AO may either be ordinary shares
or preferred shares. The total nominal value of the
preferred shares may not exceed 25% of the charter
capital of an AO. Holders of ordinary shares have equal
rights to participate and vote at a shareholders’ meeting,
and receive dividends and part of the company’s funds
upon liquidation. Preferred shares may be issued in
different categories with different rights to dividends,
voting rights, etc. These rights must be stipulated in
the charter of the company. Unless otherwise provided
in the company’s charter, preferred shares carry the
same rights to dividends as ordinary shares. Generally,
shareholders holding preferred shares cannot vote at
the shareholders’ meetings, however, they carry voting
rights in respect of a limited number of matters, such
as, e.g., the company’s reorganization and liquidation.
Shareholders may sell their shares to other
shareholders without consent of other shareholders
or the company. Should a shareholder of a non-public
AO wish to sell shares to a third party, the other
shareholders and the company itself (if their preemptive rights are provided for in the charter) have
a pre-emptive right to buy such shares at the price
agreed with the potential buyer.
Shareholders may enter into a shareholders’
agreement where they may undertake to vote in a
particular manner at general meetings, agree on voting
options with other shareholders, acquire or dispose
of shares at a pre-determined price and/or upon the
occurrence of certain events, etc. Similarly to the
agreements on participants’ rights, the shareholders’
agreements may also be governed by non-Russian
law, if at least one of the parties is a foreign person.
However, the mandatory rules of Russian law apply to
certain issues, such as the matters of establishment
and legal capacity of a company, “internal relations”
including the relationship between the company and its
shareholders, the shareholders’ liability, etc. Further,
it should be noted that when it comes to resolution of
disputes arising out of the shareholders’ agreements,
Russian courts interpret the law in such a way that only
Russian state commercial courts have jurisdiction
over such disputes and they may not be transferred to
international arbitration. The AO itself still cannot be a
party to a shareholders’ agreement and does not need
to be aware of its contents, but it must be notified of
the existence of such an agreement. As regards public
AOs, information on the conclusion of a shareholders’
agreement must be disclosed in accordance with
Russian mandatory disclosure rules. Still, there is
little court practice for recognition of enforceability
of certain provisions of shareholders’ agreements by
Russian courts.
3.4.2.3 Management bodies
The management bodies of an AO are usually the
shareholders’ meeting, the board of directors
(supervisory board) and the executive body: either
a CEO or, rarely, a CEO and a collegial executive
board. The powers of the sole executive body may be
performed by several persons acting either jointly or
independently. The board of directors is not mandatory
and the company management bodies may, thus,
consist only of the shareholders’ meeting and the CEO.
The shareholders’ meeting is the company’s supreme
decision-making body. Shareholders’ meetings must
be held at least once a year, but not earlier than two
months before and not later than six months after the
completion of the financial year. Holders of 10 or more
per cent of shares, the board of directors and AO’s
external and internal auditors may initiate convening of
extraordinary shareholders’ meetings.
The procedure for convocation and holding the
general shareholders’ meeting is rather formal and in
certain cases a violation of this procedure may even
result in invalidity of the decision. This is important to
remember because, for example, a number of issues
within the competence of the shareholders’ meeting,
such as approval of annual reports, election of the
board of directors and the internal audit committee
and appointment of the company’s external auditor
may not be approved by absentee voting. However, the
procedural requirements do not apply to joint stock
companies with the sole shareholder and all decisions
in such companies are adopted by a written resolution
of the sole shareholder.
The executive management body may consist of either
a CEO or (if there is a special reason for this) a CEO
and a collegial executive board. The CEO and members
of the collegial executive board may be elected to the
board of directors but may not occupy more than 25%
of the board seats. A CEO cannot act as chairman of
the board of directors.
If a foreign investor wants to establish an AO together
with a Russian party, the foreign investor should try to
secure a majority holding of at least 75% of the votes.
For example, a 75% majority is required by the JSC
Law in the following cases:
• Amendments to the charter;
• Reorganization;
• Liquidation;
• Determination of the amount, nominal value, type of
declared shares and rights pertained thereto; and
• Acquisition of placed shares by a company.
3.4.2.4 Audits and disclosure
A non-public AO may set up an internal audit committee
or elect an internal auditor to oversee its financial and
economic activities. These bodies are to be formed by
the general meeting of shareholders. As in an OOO,
the chief accountant plays an important role, and a
foreign investor wishing to establish an AO in Russia
should find a chief accountant even before applying for
registration.
An AO is subject to a number of disclosure requirements
in case of a public securities offering.
3.4.2.5 Share-capital increase
The share capital of an AO may not be increased until
the original share capital has been paid in full. The
increase may thereafter be executed by raising the par
value of the existing shares or by issuing new shares.
Increasing the share capital is a complicated procedure
which requires registration with the Central Bank of
Russia.
3.4.3 Procedure for establishing an OOO and AO
A company is considered to be founded on the date
when it is registered with the tax authorities.
Registration of companies is governed mainly by the
Federal Law On State Registration of Legal Entities
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No. 129-FZ dated 8 August 2001. Under this act,
the Russian Federal Tax Service is responsible for
registration of companies in Russia. All documents
submitted for registration signed outside the Russian
Federation must be notarised and legalised/apostilled
by a notary. Foreign language documents have to be
apostilled in the country of execution and provided with
a Russian translation which must have a notarized
certification.
A foreign company wishing to establish a company in
Russia is expected to prepare the following documents,
most of them to be filed with the Russian authorities:
• An application for registration;
• Minutes of founders’ meeting/Resolution of the
founder regarding establishment of the Russian
company;
• The charter of the Russian company;
• Copy of the passport of the proposed CEO(s)
(General Director(s) of the Russian Company);
• Powers of attorney issued by the founder(s) for
actions related to the establishment of the company;
• Powers of attorney issued by the founder(s) for
filing the application for registration;
• Documents confirming legal status of each
founder (e.g., registration certificates, articles of
association, etc.);
• Confirmation of payment of state fee for registration
of the Russian company.
Chapter 4
4
Competition
4.1 Overview
The significance of competition law, also known as
antimonopoly law, is increasing in many countries,
and non-compliance with legislation results in everincreasing penalties. The first modern antimonopoly
legislation was adopted in 1991 but has been
significantly amended a number of times since then,
most importantly through the enactment of the Federal
Law No. 135-FZ “On protection of competition” (the
“Competition Law”), which took effect on 26 October
2006 and has been substantially amended since then.
The main objective of Russian antimonopoly legislation
is the same as that of EU legislation, which is to ensure
fair competition in the goods, services and works
markets and in the financial markets by preventing
behaviour that is incompatible with an undistorted,
consumer friendly market. The Federal Antimonopoly
Service (FAS) is a state body that is in charge of
antimonopoly regulation. It should also be noted that
the Competition Law has extraterritorial effect, which
means that the law may apply to transactions that
were made outside Russia, but which affect or may
14
affect the Russian product markets.
Foreign companies doing business in Russia must pay
special attention to antimonopoly requirements, since
failure to comply with such requirements may result
in substantial liability and significant penalties, both
commercial (fines, invalidation of transactions and
foundation of a company) and personal (administrative
and criminal). The Competition Law contains strict
requirements and mandatory restrictions that must
be observed.
Antimonopoly regulation of financial organisations,
including credit institutions, is outside the scope of this
guide.
Antimonopoly regulation in Russia covers the following
areas:
• Establishment,
companies;
mergers
and
acquisitions
of
• Abuse of dominant position;
• Concerted actions and agreements restricting
competition;
• State aid;
• Unfair competition.
Given the complexity of antimonopoly regulation,
the following section gives a simple overview of the
requirements for companies in the forms of limited
liability companies (OOOs) and joint stock companies
(AOs), unless stated otherwise, that covers the
majority of legal entities and scenarios.
4.2 Establishment, merger and acquisition of
companies, joint ventures
To prevent uncontrolled concentration of market power,
the Competition Law stipulates that establishment,
merger or acquisition of a company that meets certain
financial criteria must be approved by FAS prior to
closing or, in a limited number of cases, notified to FAS
after closing.
4.2.1 Pre-closing approval of mergers and acquisitions
The following types of transactions require an approval
by FAS prior to closing, if certain financial threshold
described below have been met:
• Acquisition by a person or a group of persons (as
defined in the Competition Law) of more than 1/3
of participatory interests in an LLC (25% of shares
in AO) or any increases of ownership exceeding
thresholds of 1/2 and 2/3 of the participatory
interests in an OOO (50% and 75% of shares in AO).
• Acquisition by a person or a group of persons of
the assets (as defined by the law) of an entity if the
balance-sheet value of the assets exceeds 20% of
total assets.
• Acquisition by a person or a group of persons of
the rights to determine the conditions of business
activity of an entity or to exercise the powers of its
executive body.
The financial thresholds which trigger the requirement
to seek a pre-closing approval are the following:
• the aggregate asset value of the acquirer together
with its group and target together with its group
exceeds RUB 7 billion and, at the same time, the
total assets of the target together with its group
exceed RUB 250 million; or
• the total annual revenues of the acquirer together
with its group and the target together with its group
for the preceding calendar year exceed RUB 10
billion and, at the same time, the total assets of
the target together with its group exceed RUB 250
million.
4.2.2 Pre-closing approval of establishments
Similarly, to prevent uncontrolled concentration of
market power and to safeguard fair and undistorted
competition, the establishment of an entity must be
pre-approved by FAS if the establishment meets at
least one of the following conditions:
The charter capital of the entity is paid in shares2 and/
or fixed production or intangible assets that give the
newly-founded entity an amount of assets or shares
with corresponding rights as specified in item 4.2.1
and, at the same time:
• the aggregate value of assets held by the founders
(and their respective groups) and by the entities
(and their respective groups) whose shares and/or
assets are contributed to the charter capital of the
newly-founded entity exceeds RUB 7 billion; or
• the total annual revenues of the founders (and
their respective group) and the entities (and their
respective groups) whose shares and/or assets
are contributed to the charter capital of the newlyfounded entity for the preceding calendar year
exceed RUB 10 billion.
4.2.3 Pre-closing approval of joint venture agreements
Starting from January 2016 the agreements between
competitors providing for their joint activity in Russia
is subject to prior FAS approval if any of the following
financial thresholds are met:
• the aggregate asset value of the parties to the joint
venture agreement together with their respective
groups pursuant to the most recent balance sheets
exceeds RUB 7 billion; or
• the total annual revenues of the parties to the joint
venture agreement together with their respective
groups for the preceding calendar year exceed RUB
10 billion.
4.2.4 Post-closing notification
There are no post-closing notification requirements
in Russia except for certain intra-group transactions
2 For this purpose, “shares” means shares in a joint-stock company or
participatory interests in an OOO.
(see item 4.4 for more details).
4.3 Application review terms
The Competition Law sets out a 30-day review period
for pre-closing approval of transactions. The review
period may be extended for another two months if
FAS believes that the prospective transaction might
restrict competition in a particular market.
The information about the submitted filing must be
posted on FAS official website. Parties potentially
affected by such transactions may then provide FAS
with information about the effect of a transaction on
a particular market. FAS has significant discretion in
deciding what comprises a particular market both in
terms of geographical boundaries and types of product
or service.
The parties can contact FAS before submitting
the formal application and provide documents and
information regarding contemplated transaction as
well as propose specific conditions for approval of the
transaction aimed at protection of the competition. FAS
will consider such preliminary provided information
and proposals in its review of the formal application.
Pursuant to amendments to the Competition Law which
came into force in January 2015 the applicant may
choose to submit the application to FAS in electronic
form. However, FAS has yet to issue corresponding
clarifications regarding procedure of electronic
submission of applications as well as procedure of presubmission contacts with FAS.
4.4 Intra-group transactions
The Russian merger control rules also apply to
transactions between entities belonging to the same
group of persons. However, intra-group transactions
involving group companies related to each other via
shareholding greater than 50% of the voting shares,
are exempted from the requirement to seek a preclosing approval.
Further, intra-group transactions that may be subject
to obtaining a pre-closing approval on the general
grounds, can be notified post-closing using a special
simplified procedure where the group shall fulfill the
following preconditions: (a) a list of all the members
of the group of persons must be submitted to FAS at
least one month before the relevant transaction (the
list will be published on FAS’s official website); (b) as
of the date of performance of the relevant transaction,
the list must be correct and up-to-date without any
changes in the group; and (c) the relevant transaction
must be implemented within the group only.
4.5 Foreign-to-foreign transactions
The Competition Law may also apply to foreign-toforeign mergers and acquisitions. A transaction is
subject to merger control if the transaction relates to
shares/participatory interests in Russian entities or
assets located in Russia, or if it relates to shares of nonRussian entities which had supplied goods to Russia
for the amount exceeding RUB 1 billion (around EUR
13 million) during the year preceding the transaction.
According to the current position of FAS, it will decide
on the latter at its own discretion.
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4.6 Abuse of dominant position
The Competition Law includes criteria to determine
whether an entity together with its group or several
unrelated entities have a “dominant position” on a
particular market. The position of an entity depends
on the size of its market share, the structure of the
market and participants in the market as described in
the Competition Law. Dominant companies are subject
to certain restrictions on their activity. A dominant
position exists if a company:
• can have dominant influence on the general
conditions of the circulation of its goods on a market;
• can remove other companies from such market; or
• can impede another company’s access to such
market.
A dominant position on a particular market has farreaching consequences for the company. If a company
has a dominant position, it must refrain from any
behavior that restricts competition and infringes
the interests of other commercial entities of sole
entrepreneurs or of unspecified range of consumers
(but not an individual consumer), including but not
limited to the following activities:
• Price fixing;
• Withdrawal of goods from circulation resulting in
price increases;
• Dictating terms unfavorable to a counterparty or
irrelevant to the subject-matter of the agreement;
• Reduction or termination of production of goods
for non-financial or non-technological reasons if
demand for the goods exists so long as the goods
can be produced at a profit;
• Refusal to enter into an agreement with particular
buyers or customers if the goods can be produced
or supplied;
• Fixing of disparate prices (tariffs) for the same goods
for non-financial or non-technological reasons;
• Creation of discriminatory conditions;
• Creation of barriers to enter or exit a particular
market;
• Carrying out any other activities that result or may
result in the prevention, limitation or elimination of
competition and/or the infringement of interests of
other persons.
4.7 Prohibition of cartels, agreements
competition and concerted actions
limiting
4.7.1 Cartels
The Competition Law defines “cartels” as agreements
between competing entities (i.e., entities engaged in
sale or entities engaged in purchase of goods on one
and the same product market), if such agreement
leads or may lead to fixing of prices and tariffs,
16
discounts, extra charges or margins; co-ordination of
bids for auctions or tenders; division of a market by
territory, volume of sales or purchases; reduction or
termination of production of goods; or refusal to enter
into an agreement with certain buyers or customers.
Cartels are prohibited by the Competition Law.
4.7.2 Agreements limiting competition
The Competition Law generally prohibits agreements if
they lead or may lead to limitation of competition, such
as agreements that impose unfavourable contractual
terms and conditions which are not related to the
subject matter of the agreements; agreements setting
different prices (tariffs) for the same goods in the
absence of economic, technological or other justifiable
grounds; agreements which create barriers for other
entities to enter or leave the market; or agreements
establishing membership conditions in professional
and other associations.
The Competition Law does, however, expressly exempts
from the said prohibitions (i) IP licensing or disposal
agreements, (ii) joint venture agreements approved
by FAS and (iii) so-called vertical agreements –
agreements between customers/potential customers
and producers/potential producers – if they relate to
commercial concessions or as long as each party does
not control more than 20% of a market.
4.7.3 Concerted actions
“Concerted actions” are coordinated actions taken
by competing entities in the absence of any formal
agreement.
The Competition Law generally prohibits concerted
actions if they lead to the following consequences:
fixing or maintaining prices (tariffs), discounts, extra
charges or margins; co-ordination of bids for auctions
or tenders; division of a market by territory, volume
of sales or purchases; reduction or termination
of production of goods; or refusal to enter into an
agreement with certain buyers (customers) for nonfinancial or non- technological reasons and others.
Importantly, the prohibition of concerted actions
does not apply to entities with an aggregate share
on the relevant market not exceeding 20% and each
individual entity’s share not exceeding 8%, or if all such
entities belong to one group.
4.8 State aid
The Competition Law defines state aid as the state’s
granting a company certain privileges, ensuring more
favourable conditions for its activity by transferring
property and (or) civil rights or property benefits. The
Competition Law regulates the procedure of providing
state (or municipal) aid for certain purposes, such
as carrying out fundamental scientific research,
environmental protection, cultural development and
conservation of the cultural heritage, and agricultural
production.
State aid is granted with preliminary written approval
by FAS unless such aid is directly granted by law, a
regulatory act of a local government on budget or from
reserve funds in compliance with legislation on budget.
4.9 Unfair competition
Unfair competition is defined as any action aimed
at acquiring competitive advantages in commercial
activity that do not comply with competition law,
business customs, good-faith, reasonableness and
fairness, and that may cause losses to other market
participants. Unfair competition is prohibited.
Examples of unfair competition include distribution
of false information; misleading consumers about the
nature, methods and place of production; incorrect
comparison by a commercial entity of goods produced
or sold by this entity with the goods of other commercial
entities; and receipt, use and disclosure of scientific
and technical, production or trade information without
the consent of the commercial entity to which this
information belongs.
4.10 Antimonopoly and competition control
FAS is a state body which performs competition
and antimonopoly control by way of administrative
procedures and, if necessary, by referring requests or
matters to the law enforcement bodies.
FAS may run regular inspections (once in every three
years) as well as extraordinary on-site inspections of
a company or an individual (for instance, a company’s
officer). During such inspections FAS is entitled to:
• access and examine a company’s or individual’s
territory, premises (except for residential
premises), documents, things and belongings; and
• request documents, explanations and information
and also to question the company’s employees and
officers.
When making regular inspections, FAS must issue a
written notice and serve it on the company at least 3
working days before the inspection. In the case of an
extraordinary inspection, the written notice must be
served no later than 24 hours before the inspection.
Examination of a company’s or individual’s territory,
premises (except for residential premises), documents,
things and belongings must be carried out in the
presence of no less than two witnesses who may not
be FAS’ officers. FAS has the right to do photo- and
video- recordings, take copies of documentation and
engage experts. The company’s representatives are
entitled to participate in the examination procedure.
Upon completion of examination FAS must draw up a
written protocol.
In some instances of abuse of dominant position,
unfair competition and in all instances of actions of
authorities restricting competition FAS must issue a
written warning to a company, sole entrepreneur or
authority prior to initiating administrative proceeding
against it. Such warning must indicate reasonable term
to stop the violation and to remedy its consequences.
FAS cannot initiate administrative proceedings before
expiration of such term.
Where a criminal offence may be suspected, FAS
may refer the matter to the law enforcement bodies
for investigation. FAS may also engage the competent
law enforcement bodies if it intends to run any special
procedures (such as surveillance, interrogation and
seizure).
4.11 Sanctions
If a transaction (or foundation of a company) that
requires a pre-closing approval or a post-closing
notification is performed without such approval or with
procedural violations, it may be challenged in court by
FAS and declared invalid (a newly-founded company
may be involuntarily reorganized or liquidated).
All revenue earned through violations of the
antimonopoly legislation may be levied from the
violating company by court.
In cases of systematic violations of the antimonopoly
legislation, FAS may ask the court to split the entity. To
be considered systematic, such violations must take
place at least twice during three consecutive years.
Penalties may be levied on entities and individuals
engaged in violations of the antimonopoly legislation.
The penalties range from fines imposed on individuals,
entities and their senior officers.
Chapter 5
5
Legislation on foreign investments in strategic
sectors
5.1 Overview
In 2008 various regulations that affected foreign
investments in the Russian strategic sector were
codified in a single act – Federal Law on Foreign
Investment in Companies Having Strategic Importance
for State Security and Defence, No. 57-FZ, dated
29 April 2008 (the “Law”) that came into force on
7 May 2008. Previously, foreign investments in
strategic sectors were regulated by many separate
uncoordinated legislative acts. The rules relating to
foreign investments were unclear and, in addition, the
Government had intervened in a number of high-profile
transactions on an ad-hoc basis.
The Law was presented as an act to protect Russia’s
national security and defense. It lists the sectors of
the national economy which are deemed strategic and
where foreign investments are subject to restrictions
or special approval procedures.
The Law has extraterritorial effect in the sense
that it is applicable not only to direct acquisition of
Russian undertakings, but also to foreign-to-foreign
transactions if they result in establishing indirect
control over a Russian strategic company.
After 2008 several changes have been introduced to
the Russian corporate legislation and legislation on
foreign investments aimed at harmonizing it with the
rules on strategic sector.
Since the time of enactment of the Law, some of the
deficiencies in the Law have been revealed. In particular,
this concerns the definition of “group of entities” – a
term borrowed from the anti-monopoly legislation. The
17
definition was so broad that technically any Russian
group of companies having a foreign subsidiary would
fall under the Law’s requirement to seek a governmental
permit in case of acquisitions in the Russian strategic
sectors, even if such acquisitions did not concern the
foreign subsidiaries of a group. Further, the definitions
of certain types of activities were so general that
businesses that were not intended to be caught by
the Law technically fell under its rules. As a result,
after long debates on 1 November 2011 the State
Duma adopted Law No. 503176-5 on Amendments
to Article 6 of the Federal Law on Foreign Investments
in the Russian Federation and to the Federal Law on
Foreign Investment in Companies Having Strategic
Importance for State Security and Defence. These
amendments have refined the definition of a group of
entities, changed certain thresholds for transactions
subject to control, excluded some types of business
from the list of strategic activities and adjusted the
administrative procedures.
In April 2013 the Russian Government has approved
and submitted to the State Duma a new set of
amendments aimed at liberalisation and simplifying
the administrative procedures. In particular, the
amendments propose to exclude from the regulatory
procedure an increase of shareholding in subsoil users
by foreign investors who already own 75% or more in
such companies and several other changes. The next
major overhaul of the Law occurred in November
2014. The new amendments were generally aimed at
liberalisation of the regulation, but at the same time
they introduced new types of transactions subject
to approval, such as transactions with the assets of
Russian strategic companies. So far not all of these
amendments have been tested by court practice and
the view of the regulatory authorities will have a crucial
role in the nearest future.
Official statistics indicate that the Law has not
dramatically affected the investment climate in Russia.
In June 2015 the Russian Federal Antimonopoly
Service (FAS) which monitors application of the Law
reported that during the last seven years 372 petitions
on establishment of control over strategic companies
were submitted to FAS, out of which 180 were passed
by FAS to the Governmental Commission on Control
on Foreign Investments which is the decision-making
body. Of these petitions 169 petitions were approved
(in 44 cases certain obligations were imposed on the
foreign investors) and 10 petitions were rejected.
5.2 Russia’s strategic sectors
The Law lists 45 types of activities that are considered
to be of strategic significance to national security and
defence. These activities may be grouped as follows:
• Natural monopolies, particularly oil and gas, rail
transport, services at transport terminals, ports
and airports;
• Nuclear energy and nuclear waste industry;
activities related to handling radioactive
substances;
• Activities related to aviation and aircraft safety;
18
• Geological exploration and extraction of natural
resources at sites of federal importance;
• Defense industry;
• Space industry;
• TV and radio broadcasting;
• Large-scale printing and publishing;
• Telecommunications industry;
• Fishing and harvesting bioresources;
• Cryptography and encrypted information systems;
• Activities related to security of transportation.
5.3 Foreign investors
Pursuant to the Law, foreign investors whose
acquisitions are subject to control are defined as:
• any non-Russian resident, including foreign legal
entities, organisations, individuals, governmental
and international organisations;
• a group of companies which includes a foreign
company.
5.4 Transactions covered by the Law
Acquisition of the following types of control of a
company within a strategic sector (strategic company)
is governed by the Law:
• Direct or indirect control of more than 50% of the
votes in a strategic company (or more than 25% of
the votes in a strategic company engaged in subsoil
activities of federal importance);
• Right to appoint the CEO of a strategic company;
• Right to appoint 50% or more of the members of
the board of directors or supervisory board or
management board of a strategic company (or more
than 25% of the members of the board of directors,
management board in a strategic company engaged
in subsoil activities of federal importance);
• Right to perform the functions of the management
company of a strategic company;
• Right to make the decisions of the management
bodies of a strategic company;
• Ownership or rights of possession or use of main
production assets of a strategic company, if their
value exceeds 25% of the company’s balance sheet
value as per the latest balance sheet.
Under the Law, acquisition is defined as any type of
transaction involving sale and purchase agreements,
gifts, swaps, lease, management or any other types of
agreement.
Currently, intra-group transfers are also caught by the
Law if the group has foreign participants. However,
transactions between non-Russian entities under
control of the Russian Federation or Russian citizens
who are tax residents of the Russian Federation are
exempt from control.
The Law also applies to situations where control is
acquired through re-distribution of votes as a result
of redemption of the strategic company’s shares,
conversion of shares, etc.
However, the latest amendments to the Law provided
more exemptions or further specified the already
existing exemptions pertaining to transactions which
previously required prior consent, such as certain
transactions relating to strategic companies engaged
in subsoil activities of federal importance, intragroup transactions and transactions where control is
exercised by Russian entities or individuals.
5.5 Definition of control
Indirect control means a foreign investor’s or its group’s
right to exercise voting rights in a strategic company
through third parties.
Control means a foreign investor’s or its group’s right
to directly or indirectly, through any of the following
rights, determine the decisions of a strategic company:
• The right to dispose of more than 50% of the votes
in a strategic company, including by foreign states
or international organisations or persons under
their control, even if they do not form a group of
persons.
• The right to dispose more than 25% of the votes in
a strategic company engaged in subsoil activities of
federal importance.
• The right to dispose less than 50% of the votes in
a strategic company, if the distribution of voting
shares is such that a foreign investor may still
determine the decisions of the strategic company,
including by foreign states or international
organisations or persons under their control, even
if they do not form a group of persons.
• The right to sit on the board of directors,
management board or other management body of a
strategic company.
• The right to perform the functions of the
management company of a strategic company.
• The right to appoint the CEO of a strategic company.
• The right to appoint 50% or more of the members of
the management board of a strategic company (or
more than 25% of the members of the management
board of a strategic company engaged in subsoil
activities of federal importance).
• The right to appoint 50% or more of the members
of the board of directors or other collective body
of a strategic company (or more than 25% of
the members of the board of directors or other
collective body in a strategic company engaged in
subsoil activities of federal importance).
• Other rights to determine the decisions of a
strategic company.
The right to block resolutions means that the foreign
investor or its group may directly or indirectly prevent
resolutions by a management body of a strategic
company that may be passed only by a qualified
majority or unanimously.
5.6 Special rules for foreign states and international
organisations
Foreign states and international organisations are not
allowed to acquire control over strategic companies.
Foreign states and international organisations must
obtain prior approval of transactions resulting in direct
or indirect acquisition of 25% or more of the voting
rights, the right to block resolutions, or acquisition of
5% or more of the voting rights in strategic companies
engaged in subsoil activities of federal importance.
Notably, in 2008 the Federal Law On Foreign
Investments in the Russian Federation dated 9
July 1999 was amended with a rule saying that
an acquisition by a foreign state or international
organisation or by a company under their control of
more than 25% of votes in, or other rights to block
decisions of, any Russian company (regardless of
whether such company belongs to a strategic sector)
shall be subject to the approval procedure envisaged
by the Law.
International agreements on investments ratified by
Russia may provide exemption from these limitations.
The 2011 amendments to the Law have expressly
exempted from the Law’s application transactions
of international financial institutions established in
accordance with international treaties or with which
the Russian Federation has concluded international
treaties (the list of said organisations has been
recently approved by the Government of the Russian
Federation and includes such institutions as EBRD,
IFC and similar).
5.7 Procedures
The Law establishes the following procedures relating
to investments in a strategic company:
• prior approval of acquisition of control, or
• post-closing request for approval, or
• post-closing notification.
The state agency which handles applications for prior
approval and post-notifications is the Russian Federal
Antimonopoly Service (FAS).
5.7.1 Prior approval of acquisition of control
The foreign investor (or its group) must obtain approval
of an acquisition of control over a strategic company (or
a series of transactions resulting in such acquisition)
prior to the conclusion of the acquisition. If it is not
clear whether a prior consent is required, the foreign
investor can submit an inquiry to FAS. FAS must send
19
its answer within 30 days.
Step 1
The process starts with the foreign investor’s filing of a
standard form application with FAS. FAS must review
the application within 14 days from the day of filing
with the aim to identify whether the contemplated
transaction will result in the foreign investor acquiring
control over a strategic company.
Step 2
Should the result of FAS’s first review be positive, FAS
must continue with the procedure by sending requests
to the following state agencies within three days:
• The Federal Security Service (the FSB) and
Ministry of Defense: a request to check whether
the contemplated acquisition may result in any
threat to Russia’s defence and security. The FSB
and Ministry of Defense must reply to such request
within 30 days.
• The Inter-Departmental Commission on protection
of state secrets (the Commission): if the strategic
company holds a license to work with state secrets,
the Commission must establish whether Russia
has an international treaty with the relevant
country that would allow the foreign investor’s
officers and employees to work with state secrets.
The Commission must reply to such request within
14 days.
Step 3
FAS must submit the application together with the
answers from the FSB and Ministry of defence to the
Governmental Commission on Control on Foreign
Investments in the Russian Federation (the Control
Commission) presided by the prime-minister.
The Control Commission must make its decision within
30 days, but in exceptional cases, it may extend this
period for up to three months. The Commission can
make one of the following decisions:
• Grant prior approval of the acquisition of control;
• Grant prior approval of the acquisition of control
subject to the foreign investor’s agreement to
undertake certain obligations imposed by the
Control Commission;
• Refuse approval.
The applicant may challenge the Control Commission’s
decision in the High Arbitrazhny (Commercial) Court
of Russia. FAS’s actions may be challenged in court in
accordance with the regular procedure.
5.7.2 Obligations as a condition for approval
The Law lists nine types of obligations, any or a
combination of which may be set by the Control
Commission as a condition for granting prior approval
to the foreign investor.
These obligations include obligations to ensure that the
strategic company’s management bodies are formed
by persons who are allowed to work with state secrets,
20
that the strategic company continues to provide
supplies for state defence orders, that the strategic
company keeps a defined number of employees, that
the foreign investor prepares a business plan to be
submitted to FAS together with an application etc.
The foreign investor’s undertaking to perform such
obligations must be formalized in an agreement with
FAS.
The agreement must be entered into within 30 days of
the day when the Control Commission informed FAS
of the need to sign such an agreement, and it must
remain in force as long as the strategic company is
under the foreign investor’s control. Refusal by the
foreign investor to conclude the agreement is a ground
for refusal of a prior approval.
The entire procedure described above must not exceed
three months from the filing date, but in exceptional
cases, the Control Commission (see Step 3 above)
is allowed to extend the review period for up to three
additional months.
5.7.3 Post-closing request for approval
A foreign investor must file with FAS a post-closing
request for approval, if such investor has acquired
control over a strategic company as a result of:
(i) re-distribution of votes following redemption of the
strategic company’s shares,
(ii) conversion of a strategic company’s shares, or
(iii) other transactions envisaged by the Russian law.
In such case the foreign investor must file with FAS
a request for approval of the acquisition within three
months of the day when control was established.
If, as a result of consideration of the notification, FAS
refuses to give the foreign investor acquiring control
over the strategic company, the foreign investor must
dispose of a sufficient number of shares within three
months after the date of refusal to reduce holdings
to a size that does not give control over the strategic
company.
5.7.4 Post-closing notification
A foreign investor must inform FAS about an acquisition
of at least 5% but no more than 50% of the shares of
a strategic company as well as about consummation
of transaction for which a prior approval has been
granted in accordance with the Law.
5.7.5 Sanctions for non-compliance
The Law provides for the following sanctions for noncompliance with procedures for obtaining an approval
of acquisition:
• The court may declare a transaction null and void;
• The court may deprive the foreign investor of its
voting right at the general meeting of shareholders;
• The court may declare null and void those
resolutions of the shareholders’ general meetings
which were taken while a strategic company was
under unlawful control;
land; (iii) industrial land; (iv) protected land; (v) forestry
land; (vi) water front land; and (vii) reserve land.
• The court may deprive the foreign investor of voting
rights attached to the foreign investor’s shares if
the foreign investor is in breach of the agreement
made with FAS (see 5.7.2);
The Land Code requires that each category of land
be used in accordance with its designated purpose.
Normally, developers of commercial and residential
development need to have the land plots on which their
buildings/structures are to be located categorized as
land of settlements or industrial land.
• In addition, FAS may impose fines for failure to
submit necessary information or to comply with its
orders.
Chapter 6
6
Real estate
6.1 Introduction
The Russian real estate market was significantly
affected by the negative economic trend during 2015.
It is expected that this trend will continue during 2016
if the oil prices stay low.
6.2 Concept of real estate
Under Russian law, real estate includes land plots,
subsoil plots, buildings and structures, and everything
that is securely attached to the land, i.e. any object
which cannot be relocated without disproportionate
damage to its intended purpose. Therefore, the main
characteristic of real estate under Russian law is its
inseparable attachment to the land.
6.3 Russian real estate law
Russian real estate law is subject to frequent changes
(with new and old regulations sometimes overlapping).
Also, sometimes it is not clear how and whether
specific rules may be enforced by authorities.
Property rights are set forth primarily in the Russian
Constitution, the Civil Code, the Land Code and the
Town-Planning Code.
6.4 State cadastral registration
Under Russian law, every real estate object must
undergo cadastral registration and be assigned a
unique state cadastral number. Only registered real
estate may be the object of a commercial transaction,
such as a sale or a lease.
In 2008 a new cadastral register was introduced which
integrated cadastral registration of major types of real
estate, including land plots, buildings, constructions,
premises and objects not finished by construction. The
new cadaster contains information about real estate
objects but does not include rights over subsoil areas.
All information about the cadastral registration of
real estate must be entered in the State Real Estate
Cadaster. This information is publicly available.
6.5 Categorisation of real estate
Real estate is broken down into categories depending
on its intended use. Buildings are generally classified
as residential or non-residential, whereas land is
divided into the following categories depending on their
designated purpose: (i) agricultural land; (ii) residential
Land within each particular category is also subject
to specific requirements for the use of such land
established by federal, regional laws and local
regulations. For example, land in urban areas is subject
to specific zoning, including residential, administrative
and business, industrial, engineering and transport
infrastructure, recreational, agricultural, special
purpose and military zones. Further, each land plot is
assigned a certain type of permitted use (for example,
a land plot for allocation of a residential house or a
shopping mall, etc.).
Following a specific procedure, the land may be
converted from one category to another. The type of
permitted use of a land plot may also be changed.
6.6 Ownership to real estate
Russian law recognizes state, municipal and private
ownership to real estate. Transfer of land and buildings
from one person to another as well as transfer of
real estate from state or municipal authorities to
private legal entities and individuals (privatization) are
permitted.
Although private ownership to land is allowed under
federal law, in practice it is not widespread in many
parts of Russia, including the city of Moscow.
As a general rule, foreign citizens and legal entities
are permitted to own land plots subject to the same
restrictions as Russian citizens and legal entities.
However, Russian law prohibits foreign citizens and
foreign legal entities to own land located in zones near
national borders. A list of such zones was adopted
by a Presidential Decree in 2011. In addition, foreign
citizens, foreign legal entities as well as Russian legal
entities which have a foreign shareholding exceeding
50% are not permitted to own agricultural land.
With the exception of the limitations for foreign
citizens and legal entities just mentioned, anyone,
including foreign citizens and legal entities, may own
a building without any discriminatory restrictions. An
owner of a building is generally permitted to sell or
lease it without any requirement to obtain a regulatory
approval, unless the transaction value reaches certain
thresholds which make it subject to a prior approval by
the Federal Antimonopoly Service.
Although buildings are inseparably attached to the
land, a land plot and a building located thereon are
considered separate objects. Under Russian law, the
owner of a building is granted exclusive right to obtain
lease or ownership title to the state or municipal
land plot on which the building is located. In case of
private land, the owner of a building located on another
person’s private land has a priority right to buy or lease
21
such underlying land.
6.7 Other rights to real estate
Apart from ownership rights, Russian law recognizes
lease, servitude, gratuitous fixed-term use of land and
operational management/financial administration.
Until recently Russian law also provided for two
peculiar types of rights to real estate: permanent
inheritable possession and permanent use. Starting
from 1 March 2015 these two types of rights were
abolished.
6.7.1 Lease
Under Russian law, a lessee is entitled to use and
possess the leased property as agreed between the
parties in a lease agreement.
A lease agreement for real estate must contain
sufficient information to identify the leased property.
Lack of such data entails a risk that the lease agreement
may be considered null and void.
Lease agreements for a term equal to or exceeding
one year are subject to mandatory state registration
and enter into force at the time of registration. Shortterm lease agreements for a term of less than one
year or lease agreements for an indefinite term do not
require state registration and enter into force at the
time of signing by the parties. Subleasing of buildings/
premises is generally permitted only upon a consent of
the landlord. In case of subleasing of a state/municipal
real estate, a tenant which has concluded a lease
agreement as the result of a tender procedure or on the
basis of an international treaty is entitled to sublease
the real estate without seeking a specific consent of
the landlord.
Sublease agreements are common in Russia. The
general rule is that the scope of rights of the subtenant
under a sublease agreement cannot exceed those
provided to the tenant under the primary lease
agreement.
It is important to note that leases survive changes
in ownership by landlords and/or ownership of the
building in which the premises are located.
Agreements made between individuals for the lease of
residential premises are called “agreements for hire”.
Agreements for hire of residential premises are not
subject to state registration, regardless of their term.
A legal entity may, however, lease residential premises
only under a lease agreement which is subject to state
registration on the conditions that apply to all lease
agreements.
6.7.2 Servitude
Servitude means a limited right of use of someone
else’s land plot. A servitude may be established by an
agreement between the owner of a land plot and another
person, for example, the owner of a neighbouring land
plot, in order to give the latter the right of passage
through the first land plot, or by a governmental act
if such servitude is needed for public interest. Any
servitude is subject to state registration.
22
6.7.3 Gratuitous fixed-term use of land
Gratuitous fixed-term use of land differs from lease
since it always involves the use of land free of charge.
State owned land may in certain cases be granted for
gratuitous fixed-term use, for example, to religious
associations for construction of religious objects.
6.7.4 Operational management/financial
administration
State and municipal unitary enterprises and
institutions can hold real estate under the right of
financial administration or the right of operational
management. Holders of these rights can use the
real estate, but are generally not entitled to dispose
of it (lease it to third parties for example) without the
approval of the state/municipal authorities.
6.8 Expropriation of private real estate
Private land may be expropriated for state or municipal
needs provided that the state authorities can prove in
court that these needs cannot be achieved without
expropriation. In addition, if the state authorities can
prove that expropriation of a land plot is impossible
without expropriation of any building located thereon,
the authorities are permitted to expropriate such
building as well.
The owner of expropriated real estate is entitled to one
year’s advance notice together with payment of the full
market value of the real estate and compensation for
any other losses suffered. If the state authorities and
the owner of the real estate cannot reach an agreement
about the compensation, such dispute must be settled
in court.
In 2015 several cases were reported when privately
owned land plots were expropriated by courts in favour
of state authorities, in particular, for the purpose of
roads construction.
6.9 State registration of rights to real estate
Under Russian law, transfer of ownership and other
transactions with real estate require state registration
and come into effect only as of the moment of making
a relevant entry in the Unified State Register of Rights
to and Transactions with Immovable Property (the
“Real Estate Register”). The Real Estate Register
is currently maintained by the Federal Service on
State Registration, Cadastre and Cartography (the
“Registration Service”). An entry in the Real Estate
Register is considered a confirmation of rights to real
estate. As a general rule, the term for registration of
the right of ownership is 10 working days and the term
for registration of a mortgagee’s rights as a rule is
15 working days. In 2015 a new rule was introduced
according to which the term for registration of rights to
real estate under transaction that has been notarized
by a public notary is 3 working days.
Ownership rights to real estate acquired before
1998 are rare but valid without registration. State
registration is required only in case of transactions
that involve such unregistered property. Rights to
real estate acquired before 1998 can, however, be
registered in the Real Estate Register on a voluntary
basis. Therefore, the Real Estate Register may not be
considered a comprehensive register of all real estate
in Russia since ownership rights acquired before
1998 may not appear in the Real Estate Register.
The Real Estate Register contains data about the
owners of real estate, transactions with such property
and registered encumbrances. This information is
available to the public for a small administrative fee,
and the Real Estate Register must reply to a request
for information within 5 working days. The owner of
the real estate or its authorized representative acting
under a notarized power of attorney can apply to the
Registration Service for more detailed information
from the Real Estate Register.
The legal correctness of the information in the Real
Estate Register is not guaranteed by the state, and it
can be challenged in court. Although the Real Estate
Register is continuously improving, it is important in
any transaction involving real estate to perform a legal
due diligence of the real estate to minimize the risk of
legal defects of title and similar risks.
6.10 Acquisition of ownership title to real estate
6.10.1 General
The right of ownership to real estate may be based on
a sale and purchase agreement, donation, barter or
any other type of agreement aimed at alienation of real
estate as well as legal succession.
Special procedures apply to concluding a sale
and purchase agreement with state or municipal
authorities in the course of privatization. For example,
it is required to follow a specific procedure which
normally includes a tender.
In respect of buildings, ownership can also be acquired
by means of constructing a new building.
Under Russian law, a seller is deemed to provide
a guarantee for the quality of the real estate being
transferred. Should the purchaser find defects of
which he was not informed, the purchaser is entitled
to claim;
• a proportional reduction of the purchase price;
• remedy of the defects within a reasonable period at
the expense of the seller; or
• compensation for expenses for the remedy of
defects incurred by the purchaser.
If the real estate has serious defects which cannot be
remedied or result in disproportionate costs of repair,
the purchaser has a right to rescind the sale and
purchase agreement and demand repayment of the
purchase price.
6.10.2 Change of ownership
The acquirer’s ownership to real estate is created when
the ownership right is registered in the Real Estate
Register. The registration is made on the basis of the
transaction documents submitted to the Registration
Service.
6.10.3 Form of agreements
Agreements regarding real estate must be executed
in writing, but do not require notarization, although it
is possible for any party to request that a real estate
agreement be notarized. Such agreements serve as
grounds for exercising the rights to the real estate.
As mentioned above, real estate sale and purchase
agreements take effect from the moment of signing,
but the acquirer’s ownership arises at the time when
the ownership right is registered in the Real Estate
Register. Lease agreements executed for a term equal
to or exceeding one year, mortgages, easements and
some other agreements require state registration to
take effect.
6.10.4 Language requirements
All agreements subject to state registration must be
executed in Russian. The authorities accept a notarized
Russian translation of agreements. A bilingual text of
the agreement can also be filed to the Registration
Service, but the Russian version of such bilingual
agreement will prevail.
6.10.5 Due diligence
It is advisable in any transaction involving real estate
to perform a comprehensive legal due diligence review
of the real estate as well as the company that owns the
real estate. A due diligence should focus on aspects
such as history of title, transactional documents
serving as a ground for transfer of rights to the real
estate, current status of rights (including inquiries to
state agencies), approvals, encumbrances, zoning,
permitted use, etc.
6.10.6 Related costs
The Registration Service’s fee for registration of
ownership right is usually paid in equal parts by the
parties of the agreement, and expenses for real estate
consultants incurred by the parties are usually paid
by each party independently, although this is for the
parties to decide. It is advisable that this decision be
reflected in the parties’ agreement.
6.10.7 Currency regulations
Purchase price or rent payments made by a foreign
entity can be denominated in foreign currency.
Payments between Russian residents must be made
in Russian rubles.
6.10.8 Construction
A person or a legal entity may acquire ownership to
a building or another construction (a new object) as
a result of erecting such an object in compliance with
relevant legislation.
In order to construct a new real estate object, a person
or a legal entity must have a valid ownership or lease
title to the land plot on which the new object will be
erected. In addition, a number of administrative permits
and approvals, including a construction permit, must
be obtained before construction begins.
Development of real estate in Russia is governed by
federal, regional and local legislation, which sometimes
may be contradictory.
23
Technically, neither regional nor local legislation must
contradict federal legislation, but in practice regional
and local authorities require compliance with regional
and local regulation even if that sometimes contradicts
federal laws. At the same time, regional and local
legislation may provide for more detailed regulation of
the development process. Such provisions are valid as
long as if they do not contradict federal laws.
In practice, development of real estate in the
Russian Federation is a multi-stage process, which
involves compliance with burdensome regulatory
requirements, co-ordination of work between many
specialists and authorizations from a large number
of authorities at federal, regional and local levels.
It is therefore advisable to consult reputable legal
and technical consultants before commencing a
constructing project.
6.11 Taxation
VAT of 18% (with few exceptions) is added to the
purchase price in a direct sale of real estate. VAT is
not charged only on the sale of land or on acquisitions
involving property-owning companies.
Property tax on buildings may be set by regional
legislation at a rate not exceeding 2.2% of the book
value of the property. The property tax varies depending
on the type of taxpayer and/or property. Land tax may
be set by municipal authorities at a rate not exceeding
1.5% of the land cadastral value and varies depending
on the type of land and its permitted use.
Rent under lease agreements is subject to 18%
VAT. Rent for office or residential premises paid by
accredited representative offices of foreign companies
may be exempt from VAT, provided that either such
VAT exemption is set in a bilateral agreement between
Russia and the foreign country where such company
is domiciled, or on the basis or reciprocity if a similar
VAT exemption for Russian companies/individuals is
granted in the foreign country. There is a list compiled
by the Russian authorities which contains more than
100 countries for whose companies a VAT exemption
is available in Russia.
6.12 Encumbrances
Real estate can be encumbered, in particular, by
easements, rights of third parties under various rightsof-use agreements and mortgages.
6.12.1 Easements
Easements may be established in favour of the general
public (public easements) or in favour of specific
persons pursuant to agreements made with them
(private easements). As an example, easements may
be imposed to enable:
Easements must be registered in the Real Estate
Register.
6.12.2 Mortgages
A mortgage of real estate is a security which gives the
creditor a priority right to satisfy its claim from the
value of the mortgaged real estate in case of default
of the debtor. A mortgage may be enforced only on
the basis of a court decision unless the mortgagee
and the mortgagor agree on out-of-court settlement
procedure. Such out-of-court settlement is possible if
it is provided for in a mortgage agreement, agreement
entailing the establishment of mortgage by virtue of
law or if the rights of the mortgagee are certified by a
mortgage bond.
A mortgage agreement must be made in writing and
is subject to mandatory state registration in the Real
Estate Register.
Upon the request of any person, the Registration
Service can issue an extract from the register to
confirm whether or not a mortgage on a property
exists.
The mortgaged property can be alienated by the
mortgagor to a third party by means of sale, gift,
exchange, contribution in the share capital of a
company or in other ways, provided that the mortgagee
consents to such transfer or the mortgage agreement
permits such transfer.
Buildings and facilities can be mortgaged only together
with the land plots on which the buildings or facilities
are located. If the underlying land plots are leased,
the lease rights to the land plots are considered to be
mortgaged together with the buildings and facilities
located on these land plots.
The mortgagor can, without consent of the mortgagee,
construct buildings and facilities on mortgaged
land, and the mortgage extends to such buildings
and constructions unless otherwise provided in the
mortgage agreement.
Chapter 7
7
Work authorization and immigration procedures
7.1 General
All foreign citizens (except citizens of the few, mostly
ex-soviet, countries that do not have a visa regime with
Russia) are required to obtain a visa to enter Russia.
• construction
of
communication
lines
to
neighbouring land plots (and, in certain cases, other
land plots);
While a foreign citizen may enter Russia on one of
several types of visas, to legally conduct business in
Russia without having an employment there, he/she
needs to hold a business visa. To legally be employed
and work in Russia, he/she needs to hold a work
visa and an individual work permit (work permit) and
generally his/her employer must hold an employment
permit, allowing it to employ foreign nationals.
• owners of communication lines to use the land plot
to maintain/repair such communication lines, etc.
7.1.1 Visa requirements and visa types
Tourist or private visit visas do not allow the holder to
• owners/users of neighbouring land plots to access
their land plots;
24
conduct business or work in Russia. For this, a business
or work visa is required. To apply for a business or work
visa in a Russian consulate in his/her country of origin,
a foreign citizen must first receive a formal letter of
invitation.
Formal letters of invitation for business visas (not
work visas) for citizens of the EU (except for the UK and
Ireland), Norway and Iceland can be issued directly by
the inviting organization or company based in Russia,
prepared on its letterhead with indication of certain
basic details.
In all other cases, such letter of invitation for a business
or work visa is issued by the Federal Migration Service
on the basis of an application by the inviting organization
or prospective employer (including representative
offices of foreign companies). To apply for issuance
of a letter of invitation for a business or work visa, an
inviting party or prospective employer must previously
have obtained a one-year registration with the Federal
Migration Service. The registration period may be
prolonged. Within the registration period a legal entity
may apply for an unlimited number of invitations.
7.1.2 Business visa
Citizens of countries that have a visa regime with
Russia, including the EU and the Nordic countries,
must obtain a business visa prior to entering Russia
for conducting business. Such business visas may be
obtained on the basis of an invitation letter (see 7.1.1
above).
A foreign citizen, staying in Russia on a business visa,
is allowed to conduct business and/or commercial
activities on behalf of a foreign company (employer)
in Russia including but not limited to participation in
seminars and exhibitions, participating in negotiations,
signing agreements and delivering lectures. A foreign
citizen may not receive any remuneration from a
Russian party for performing his/her activities;
otherwise a work permit will be required.
A business visa may be valid for 30, 90, 180 or 365
days. A business visa valid for 180 or 365 days allows
its holder to stay in Russia for a limited period of 90
days in total within a six-month period, but allows the
holder to make an unlimited number of trips in or out of
Russia during this period. In contrast, a 30- or 90-day
business visa may only be used for one or maximum
two trips during the period.
Holders of business visas cannot during their stay
in Russia change their visa status so as to obtain a
work visa. To obtain a work visa, they will have to leave
Russia and make the application for the work visa at
the relevant Russian consulate (usually in the country
of their citizenship).
The processing time and fees for a business visa vary
depending on the country where the application is
made.
7.1.3 Work visa
To work in Russia, foreign citizens must obtain a work
visa as well as a work permit.
The application for a work visa must be submitted to
the Russian consulate in the country of origin of the
applicant on the basis of an invitation issued by an
organization or company competent to invite him/
her or by the Russian Federal Migration Service on
behalf of the Russian employer (see 7.1.1 above).
The processing time and fees vary depending on the
country where the application is made.
The first work visa is valid for an initial period of up
to three months and for a single entry. After entering
Russia, the visa may be extended for the term of the
employment agreement, but not for more than one
year. A visa for a so-called “highly-qualified foreign
specialist” (see Section 7.3) is issued for the term of
the employment, but not for more than three years. A
work visa allows its holder to enter Russia an unlimited
number of times. A work visa does not limit the number
of days its holder is allowed to stay in Russia during the
term of its validity.
7.2 Employment - related documents: quota placement,
employment and work permit, patents
7.2.1 General
Companies, representative offices and branch offices
of foreign companies that wish to employ foreign citizens
from the countries whose nationals must obtain a
Russian visa (these are non-CIS countries) must apply
for a quota placement and obtain an employment
permit. The foreign citizen from the countries whose
nationals must obtain a Russian visa may be appointed
to a particular position and commence work in Russia
only after he/she has received his/her individual work
permit and work visa.
As of 1 January 2015, the quota system does not
apply to the persons coming from the countries which
do not have a visa regime with Russia (mostly, these
are former Soviet republics, so-called CIS countries).
Employment permits and individual work permits for
such persons will be issued in accordance with a
newly established patent system (see 7.2.5 below).
7.2.2 Quota placement
Employment permits and individual work permits for
foreign citizens coming from the countries whose
nationals must obtain a Russian visa are issued in
accordance with a quota system. A “quota placement”
means that the company is entered on a special list
approved by the relevant state authority and thus
allowed to employ foreign citizens. Since January
2014 a quota is determined by the Ministry of labour
of the Russian Federation based on the information on
a demand for hiring foreign employees collected from
the regional state authorities.
In order to be included on this list, companies,
representative offices and branch offices of foreign
companies that wish to employ foreign citizens from
the countries whose nationals must obtain a Russian
visa must submit to the regional state authorities,
before a certain deadline every year, an application
stating their demand for hiring foreign employees
for certain positions. The application must include
information about the number of foreign citizens
the company intends to employ for the next calendar
25
year, their nationality, their intended positions and
the approximate expected monthly salaries. The
responsible regional state authority shall transfer
all submitted applications for consideration of the
interdepartmental commission constituting from
representatives of regional subdivisions of the Federal
Migration Service, Federal Tax Service and regional
representatives of some other state institutions.
Based on the information in the application the
interdepartmental commission adopts a decision on:
• approval and acceptance of the application in full, or
• refusal and rejection of the application partially of
in full.
The interdepartmental commission reports on its
decision to the responsible regional state authority,
which shall within a certain time limit notify the
employers on the result of consideration of their
applications and also transfer the summarized
information as regards the whole region (based on
total number of applications) to the Ministry of labour
of the Russian Federation. The Ministry of labour of the
Russian Federation, having collected information from
all regions of the Russian Federation, will establish an
employment quota for foreign citizens for the following
calendar year and allocate it to different regions of the
country proportionally to their announced demands.
The quota is usually equal to the aggregate number of
foreign citizens from the countries whose nationals
must obtain a Russian visa indicated in all submitted
applications. However, depending on the economic
situation at the time when the quota is determined the
number of approved positions may be either increased
or reduced. Based on the results of quota placement
the relevant authorities issue employment permits
for each of the companies-employer. The employment
permits indicate the maximum number of individual
work permits that the company-employer can obtain
for its foreign employees for the following calendar
year.
which did not exist (have not been registered) before
the submission deadline and require foreign labour.
The amended legislation does not provide for any
specific deadlines when the employers must file their
application, this will be determined by the respective
regional state authorities based of the time limits
for consideration of every application established in
legislation.
Any company that has been provided with a quota may
subsequently apply for employment permits for the
respective foreign citizen(s) and employ the number
of foreign citizens indicated in the employment permit.
Starting from 2008, migration authorities annually
approve a list of non-quota positions. Such positions
are primarily management positions (e.g. General
Director of a company, Head of the Representative
Office, etc.) and a company planning to employ foreign
citizens to such positions is entitled to proceed with
the employment without a prior quota placement.
7.2.3 Employment permit
To employ a foreign citizen from the countries whose
nationals must obtain a Russian visa, a company must
as a rule apply for an employment permit, allowing it to
employ a foreign citizen, after having obtained a quota
placement. When applying for such a permit, the draft
employment agreement must be submitted to the
Russian migration authorities.
The employment permit is usually valid for one year
or for any shorter period of time. Employment permits
may be renewed.
Citizens of countries that do not have a visa regime
with Russia may be employed without obtaining
an employment permit, but subject to obtaining a
patent. Also, an employer engaging a “highly qualified
specialist” and Key Personnel employees (see Sections
7.3 and 7.4 respectively) is not required to obtain an
employment permit.
The regional state authority shall collect and submit
to the Ministry of labour of the Russian Federation
summarized information on a demand for hiring
foreign employees from the countries whose nationals
must obtain a Russian visa for a certain forthcoming
calendar year no later than September 1 of the current
year. Information on the approval of a quota placement
is normally available at the end of the year.
7.2.4 Work permit
The employer must apply for a work permit for its foreign
employee(s) from the countries whose nationals must
obtain a Russian visa. A foreign citizen who wants to
simultaneously have more than one employment in
Russia, must apply for a separate work permit for each
employment, except for the cases when he is employed
at two positions with the same company.
It is possible for the employer to amend their
approved applications on demand for hiring foreign
employees (apply for decrease/increase) with regard
to the forthcoming year. The regional state authority
must issue its decision in this respect no later than
December 15 of the current calendar year.
The work permit is generally valid for one year, after
which it can be renewed.
It is also possible to adjust the application (apply for
increase/decrease) during the current year through
the procedure similar to the described above, however
the final decision of the regional state authority in this
respect shall be delivered to the Ministry of labour of
the Russian Federation no later than November 1 of
the current year. The same rule applies for employers
26
Work permits for citizens of from the countries that
have a visa regime with Russia must be obtained by
and at the expense of the prospective employer. Such
work permit allows a foreign citizen to work only with
a particular employer, on a particular position and in a
specific region(-s) indicated in a work permit.
In addition, there are categories of foreign citizens
that are not required to obtain work permits to work
in Russia. The most relevant are employees of foreign
legal entities (manufacturers or suppliers) performing
installation (installation supervision) works, service
and warranty maintenance as well as post–warranty
repairs of technical equipment delivered to Russia.
There are several more categories listed in the law.
• a document on education and (or) on qualifications
issued to persons who have successfully passed the
final state examination in the Russian Federation,
dated after 1 September 1991.
Starting from 2013 foreign citizens who have acquired
the status of a temporary or permanent resident of
the Russian Federation (i.e. has obtained a resident
permit) do not need any work permit for employment
in Russia and their prospective employers do not need
to obtain employment permit for such foreigners (see
Section 7.2.3).
The above documents must be provided to the Russian
migration authorities within 30 days from the date
of issuance of the relevant work or residency permit.
The certificate of proficiency in the Russian language,
knowledge of Russian history and the legal framework
of the Russian Federation is valid within 5 years as of
the date of issue.
7.2.5 Patents
Starting from 1 January 2015 the procedure of
employing foreign citizens coming to Russian from the
countries which do not have a visa regime with Russia
has been significantly simplified: quotas, employment
and work permits system were replaced by a patent
system. A patent is a document issued to a citizen
of a country whose nationals do not need to obtain a
Russian visa confirming that the person is allowed
to work in Russia on a temporary basis and that the
employer has the right to employ such person.
These new requirements do not apply to “highlyqualified foreign specialists” and some very limited
categories of journalists and students.
There are two types of patents: (i) patents for the
persons who may be employed by legal entities,
individual entrepreneurs, notaries and lawyers, visafree foreign nationals engaged in private practice
and other entities subject to state registration and/
or licensing; and (ii) patents for the persons who may
be employed by Russian individuals to perform work in
order to meet the individual’s personal, household and
other needs not linked with entrepreneurial activities.
In order to be able to apply for a patent and a work
permit, a foreign national from the countries which
do not have a visa regime with Russia must indicate in
his migration card “work” as a purpose of his/her entry
to Russia. A foreign national has 30 days starting
from the day of entry to Russia to apply to the Russian
migration authorities for a patent. In order to obtain the
patent, a set of documents must be submitted by the
applicant. After the patent application and all relevant
documents are filed with the migration authorities, it
will take the authorities 10 business days to issue the
patent. A patent may be obtained for a period from 1
month to 1 year.
One of the main important changes of the Russian
immigration legislation which comes into effect from
1 January 2015 is that foreign nationals applying for
a work permit, patent, temporary residency permit or
residency permit in Russia are required to prove their
knowledge of the Russian language, Russian history
and Russian legal framework. This knowledge may be
confirmed by one of the following documents:
• a certificate of proficiency in the Russian language,
knowledge of Russian history and the legal
framework of the Russian Federation; or
• a documents on education (at least at the level of
basic general education), issued by an educational
institution of the state that was part of the USSR
before 1 September 1991; or
7.3 Highly-qualified specialists
Since 1 July 2010 it became possible for the foreigner
to be employed in Russia in the status of a so called
“highly-qualified specialist”, which provides for some
differences from the regular foreign employees.
Generally, a “highly-qualified specialist” is a foreign
employee whose monthly gross salary is not less
than RUB 167’000 and who possesses substantial
experience, skills and who has made considerable
achievements in a particular area of business. The
annual gross salary threshold for scientific and
academic staff employed for doing scientific research
or teaching activities is RUB 83’500. There is no salary
threshold for those foreigners who will participate in
the implementation of the Skolkovo project.
The decision to classify a foreign employee as a “highlyqualified specialist” is at the discretion of the employer,
subject to fulfillment of the criteria above.
“Highly-qualified specialists” may be employed without
a quota placement and the employer is not obliged
to obtain an employment permit to employ a highlyqualified specialist.
In addition, an individual work permit for a highlyqualified employee can be valid for a period of up to
three (3) years with the possibility of renewal.
There are further advantages and procedural
simplifications for “highly-qualified specialists” which
make this status desirable in practice.
The possibility to employ “highly-qualified specialists”
is reserved only for employers who are registered as a
Russian legal entity or as a branch or a representative
office of a foreign legal entity.
7.4 “Key Personnel”
On 28 December 2013 Russian immigration
legislation introduced a new category of foreign
employees, namely – foreign employees working in
Russian subsidiaries, branches or representative
offices of the foreign companies-employers, registered
in the member states of WTO, that can be jointly
regarded as a so-called “Key Personnel” employees.
The legislation, however, does not provide for any
official name of this category of foreign employees.
27
In contrast to the category of “highly qualified
specialists” the possibility to employ “Key Personnel”
is granted for employers registered as a Russian
legal entity (Russian subsidiary of a foreign company),
branches or representative offices of foreign
companies.
A foreign citizen applying for obtaining a work permit
in Russia under the category of “Key Personnel” shall
meet the following criteria:
•
the immediate and continuous period of his/her
work with a foreign company before commencing
employment at its Russian subsidiary, branch or
representative office should be at least one (1)
year;
•
his/her position at the Russian subsidiary, branch
or representative office of the foreign company
shall fall under the category of key managing
positions (e.g. Head of the branch (representative
office), General Director / Deputy General Director
of Russian company etc.);
•
FOR SUBSIDIARIES AND BRANCHES ONLY: his/
her annual salary shall exceed RUB 2’000’000;
he/she should have a high level of experience
and qualifications and (or) outstanding skills
compliant with the requirements established by
the Government of the Russian Federation and
necessary for carrying out a business activity by
the Russian subsidiaries and branches of foreign
companies.
The overall number of foreign citizens employed and
treated under regime of “Key Personnel” within one
representative office of the foreign company shall not
exceed five (5) people, whilst in the representative
offices of the foreign companies carrying out its activity
in banking sphere shall not exceed two (2) persons.
There are no such restrictions as regards Russian
legal entities – subsidiaries of foreign companies and
branches of foreign companies.
“Key Personnel” employees may be employed without
a quota placement and the employer is not obliged
to obtain an employment permit to employ “Key
Personnel”.
An individual work permit for a “Key Personnel”
employee can be valid for a period of up to three (3)
years with the possibility of renewal.
7.5 Additional immigration formalities: migration
card, notification on arrival
7.5.1 Immigration card
When crossing the Russian border at an entry
port (e.g. an airport) a foreign citizen must fill in an
immigration card, indicating his/her name, passport
details, purpose of entry, etc.
The migration card consists of two parts. One part is
detached and kept by the immigration authority at the
point of entry. The second part must be kept by the
foreign citizen during the whole period of stay in Russia.
The second part must be given to the immigration
28
officials when leaving the country.
7.5.2 Notification on arrival
Within 7 working days upon arrival of a foreign
citizen to Russia an inviting (host) party must notify
the migration authorities of the arrival of the foreign
citizen. If a foreign citizen arrives to Russia on the basis
of business or work visa, the notification on arrival
must be performed by the company which invited such
foreign citizen or an employer. If a foreign citizen stays
in a hotel, notification on arrival will be processed
by this hotel. A document confirming notification of
migration authorities of a foreign citizen’s arrival must
be kept by this foreign citizen during the whole period
of stay in Russia.
If the duration of a foreign citizen’s visit does not exceed
7 working days, a notification on arrival is not required.
For highly-qualified specialists, the inviting (host) party
must notify migration authorities on arrival of such
employee to Russia only if he/she is planning to stay in
Russia for more than 90 days.
Chapter 8
8
Taxation
8.1 General
This business guide provides only a general overview
of taxation in Russia.
8.2 Corporate income taxation
Profits earned by enterprises are taxed at a rate not
exceeding 20%, of which 2% is paid to the federal
budget and 18% is paid to the regional budgets.
Regional legislative authorities are allowed to reduce,
for certain categories of taxpayers, the tax payable
to their respective budgets by up to four and a half
percentage points. In some regions of Russia, the
regional portion of profits tax may therefore be lowered
to 13.5%.
8.2.1 Corporate residence
The tax system in Russia distinguishes between
entities incorporated in Russia and entities
incorporated abroad. Foreign entities are subject
to Russian tax on profits from activities conducted
through permanent establishments in the territory of
the Russian Federation and on income from sources in
Russia. Russian entities are taxed on their worldwide
income. Certain concessions apply under double
taxation treaties. Foreign entities following specific
criteria mentioned in the Tax code can be considered
as tax residents and therefore be recognized as
Russian entities.
All taxpayers are required to obtain a tax registration
and will be assigned a taxpayer identification number
regardless of whether their activities are taxable.
8.2.2 Branch income
The term “permanent establishment” (PE) is defined
as a bureau, office, division, agency, or any other
permanent place where regular business activity
is carried on and/or is connected with exploiting
natural resources, executing works under contracts
on construction, installation, erection, assembly,
adjustment, and maintenance of equipment, , selling
goods from warehouses located on the territory of the
Russian Federation and owned or rented by a foreign
entity, supplying services or carrying out other works.
Organisations and individuals in the territory of the
Russian Federation authorised to represent foreign
legal entities on the basis of a contract, act on behalf of
foreign legal entities, conclude contracts in the name
of foreign legal entities or negotiate significant terms
of contracts are also considered to constitute a PE
of a foreign legal entity. If a Russian legal entity or an
individual acts as an agent in the course of its ordinary
business, this entity is not considered a PE. Profit
earned by a foreign legal entity through a PE in the
Russian Federation is subject to Russian corporate
profits tax.
The definition of branch income is similar to the
definition of income of a Russian legal entity, with the
exception that in the case of a branch, only income from
activity in the Russian Federation is subject to tax.
Profit from business activities of a PE in the Russian
Federation is calculated according to the profits tax
chapter of the Tax Code.
8.2.3 Income
Taxable profit is broadly defined as total income less
expenses/loss allowances. The total income is income
from sale of goods, works, services, property and
property rights, plus non-sales income (all other types
of income). Foreign currency income is converted into
rubles at a historic rate of exchange set by the Central
Bank of Russia.
As a general rule, the accrual method is applied to
calculate the taxable income. There are special rules
for the recognition of income from the transfer of title,
transfer of results of works and provision of services
as well as interest income, royalties, and rent.
Free-of-charge acquisition of property, cash, services,
works and property rights is subject to tax. Income
is recognized at a market price of the assets, which
cannot be lower than the residual value (for depreciable
property) and production (acquisition) costs (for goods,
works and services). Transferors may not deduct costs
related to free-of-charge transfers of assets.
The receipt of assets from a Russian or a non-Russian
individual or a legal entity owning more than 50% of the
Russian recipient’s registered share capital (or vice
versa) is not, however, subject to tax provided that the
assets (other than cash) are not further transferred to
third parties within one year from the date of receipt.
Income from disposal of participatory shares, nonlisted shares and certain categories of listed shares of
Russian companies is taxed at 0% rate, provided that
such shares were acquired after 1 January 2011 and
are continuously owned by a taxpayer during five years.
8.2.3.1 Capital gains
Profit from the sale of fixed assets and other property
is calculated as the difference between the sales
price and the historical cost of the asset (net book
value for fixed assets and intangible assets subject
to depreciation/amortization). Losses on such sales
reduce taxable income and may be deducted on a
monthly basis by equal amounts during a period that
equals the time difference between the useful life of
the asset and the actual time in use.
8.2.3.2 Interest and dividends
Dividends distributed by Russian entities are taxable
at a rate of 13% if the dividends are paid out to Russian
residents. Dividends to non-residents are taxed at a
rate of 15% subject to double taxation treaties. The rate
of 13% also applies to dividends paid out to Russian
parent companies of foreign subsidiaries. Generally,
tax shall be withheld by the paying entity. A special
offset mechanism applies to dividends paid out by
group companies to its shareholders. This mechanism
does not apply to distributions to recipients outside
Russia.
Dividends received by a Russian entity may be exempt
from taxation in Russia under the participation
exemption rule, provided that certain conditions are
met, for example that the shareholder owns not less
than 50% of subsidiary’s capital during the period of
no less than 365 consecutive days. The participation
exemption rule does not apply to dividends received
from a number of countries (see the list established by
the Ministry of Finance).
Interest on state and municipal bonds is taxed at 15%
with certain exemptions that may bring it down to 9%
and 0%. Other interest income is generally taxed at
20%.
8.2.3.3 Foreign income
Tax payable by Russian legal entities is calculated on
the basis of their worldwide income. Non-Russian taxes
paid by such entities on profits earned outside the
Russian Federation can be offset against the profits
tax payable in Russia in an amount not exceeding the
profits tax payable in Russia. Foreign taxes paid on
dividends received from abroad are not deductible
under domestic law.
8.2.3.4 Exchange gains and losses
Exchange gains and losses on the revaluation
of monetary assets and liabilities, payables, and
receivables in foreign currency are generally taxable/
deductible for profits tax purposes. Securities
denominated in foreign currency are disregarded for
these purposes.
8.2.3.5 Transfer pricing
The prices of transactions between affiliated parties
and prices in certain other cases are considered to
be controlled and the tax authorities may adjust them
for tax purposes. Prices in cross-border transactions
with affiliated parties are deemed to be controlled
irrespective of the transaction value, whereas prices in
domestic transactions are considered to be controlled
if their cumulative value during one year exceeds RUB
1 billion. A lower value threshold applies to domestic
transactions between affiliated parties, if one of the
parties pays natural resource exploration tax or is
subject to a special tax regime (e.g., special tax regime
29
for producers of agricultural products).
All cross-border transactions which involve exchange
of commodities (barter) and transactions with
counterparts from certain countries as per the list
approved by the Ministry of Finance are deemed to
be controlled if their cumulative value during one year
exceeds RUB 60 million. Price in such transactions
must be established at the market level. There are
five pricing methods (similar to those established by
OECD Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations) which shall be
used in order to establish a market price level in a
controlled transaction.
Taxpayers must notify tax authorities about controlled
transactions they had entered into during each year
by 20 May of the following year and file the relevant
documentation by 1 June of the following year.
Russian tax legislation provides for transfer pricing
audits of the companies where the prices of controlled
transactions shall be examined by a special state
agency. If such agency decides that the prices do
not correspond to the market level, the prices must
be adjusted to the market level for the purposes of
recalculating the corporate profits tax base. In such
case, starting from 2013, a company shall be subject
to a penalty at the rate of 20% of the amount of the
underpaid tax for the years 2014 – 2016 and 40% of
the amount of the underpaid tax starting from 2017.
Russian companies which have a status of so-called
largest taxpayers may apply for advance pricing
arrangements.
8.2.4 Deductions
8.2.4.1 General
Tax deduction is available if expenses are financially
justifiable, supported by underlying documentation
and relate to income-generating activity. Documentary
support is vital. Certain expenses must be capitalized
or deferred (expenses related to development of natural
resources, losses on sales of fixed assets). Although
an open list of deductible expenses exists, there are
also some specific non-deductible expenses and
statutory limits for deductibility of certain expenses,
including representation expenses, compensation for
use of private cars for business purposes and certain
advertising costs.
8.2.4.2 Loss carry forward
Loss carry forward provisions are available. Special
rules apply to losses on operations related to securities
and derivatives and some other operations. The carry
forward period is ten years. Loss carrybacks are not
allowed. A surviving company may utilize the losses of
a liquidated company in case of reorganization.
8.2.4.3 Interest
Interest on business loans is deductible regardless of
source and use (current and investment) subject to
the following limitations:
• Deduction is allowed within the actual interest rate.
• In respect of the related-party transactions
30
(e.g. between affiliated parties), interest may be
deducted at the actual rate but only within the
maximum rate set out by the Tax Code. For ruble
loans the maximum rate is may be within the
interval from 75 to 125% of the CBR key rate, for
euro loans the maximum rate is may be within the
interval from EURIBOR plus 4 to EURIBOR plus 7.
Other intervals are set for loans in other currencies.
Thin capitalization rules apply to loans provided by
non-Russian owners (direct or indirect) who own more
than 20% of the share capital or by Russian entities
affiliated with such owners, and to loans provided
by third parties but guaranteed by such owners or
their affiliated Russian entities. Importantly, Russian
courts also apply thin capitalization rules to foreign
“sister” companies irrespective of non-discrimination
provisions contained in Russia’s treaties with other
states for the avoidance of double taxation. If the above
criteria are met, the maximum deduction on such
loans is calculated at a 3:1 debt/equity ratio (12.5:1
for banks and leasing companies).
8.2.4.4 Insurance premiums
Expenses for mandatory insurance are deductible
subject to existing state tariff limitations. Certain
types of expenses for voluntary insurance, mainly
various types of property insurance, life insurance
and pension insurance are also deductible, but limits
may be established. Expenses for third-party-liability
insurance are deductible provided the insurance
represents a condition established by international
obligation of the Russian Federation or customary
international business practice.
8.2.4.5 R&D expenses
Generally, R&D costs, as defined by law, including
expenses for R&D that has not yielded positive results,
are fully tax deductible following completion of R&D
works (or completion of individual stages of the R&D
works) or after signing a transfer and acceptance act.
8.2.4.6 Depreciation and amortization
There exist two methods of depreciation (amortization)
for profits tax purposes (at the choice of taxpayer):
straight line method (evenly over the useful life
of assets) and non-linear method which allows
significant depreciation in the first years of use. This
method cannot be used for buildings and facilities
with useful lives of more than 20 years. Property
with initial value lower than RUB 100’000 and useful
life term shorter than 12 months is not considered
depreciable property. Revaluation of fixed assets for
tax purposes after 1 January 2002 is not possible.
Tangible depreciable property is broken down into ten
groups by statutory useful life. The useful life of fixed
assets is determined on the basis of the statutory-life
classification. Intangible assets (intellectual property
and exclusive rights to it) are amortized on the basis
of their useful life or their duration, or ten years by
default. For certain intangible assets (e.g., patents,
copyrights to software, know-how and trade secrets) a
taxpayer may set a useful life term itself provided that
such term is not shorter than 2 years. In some cases,
a special coefficient may be applied to calculate the
general depreciation allowance.
8.2.4.7 Payments to foreign affiliates
No special tax provisions address deductibility of
payments to foreign affiliates for services provided.
Royalties (periodical payments for non-exclusive rights),
payment for the provision of personnel, management
service fees, information, consultancy, legal and similar
fees, and lease payments are deducted in full, subject to
transfer pricing rules. Deductibility of audit fees other
than fees for Russian statutory audit, for example IFRS
or US GAAP, may be questionable (however, a number
of recent court cases supported deductibility of such
fees). General and administrative expenses incurred
by foreign affiliates may be deductible, but care must
be taken to ensure documentary support.
8.2.5 Tax consolidation
Starting from 2012, Russian tax law introduced a
category of so-called consolidated taxpayers which
may submit consolidated corporate profits tax
reports. Consolidation in a group for tax purposes may
involve companies which belong to one and the same
group and meet a number of criteria. The group for
tax consolidation purposes may include only Russian
organisations.
8.2.6 Tax incentives
Regional authorities may introduce tax concessions in
the form of reduced profits tax rates for their part of
profits tax but the regional tax rate cannot be lower than
13.5%. Regional authorities may introduce property
tax concessions. Tax exemptions for income received
by certain taxpayers (non-commercial organisations,
organisations financed from the Russian budget,
religious organisations and other qualifying
organisations) exist. Certain tax concessions apply to
residents of special economic zones.
8.2.7 Tax accounting
Tax accounting is mandatory in Russia. Tax accounting
may be based on statutory accounting records or
separate tax accounting may be prepared.
8.2.8 Withholding taxes
Under corporate profits tax chapter of the Tax Code,
passive income (such as dividends, interest, royalties),
income from sale of immovable property and shares
in companies with immovable property accounting
for more than 50% of assets, lease income, and
freight income from international transport received
by foreign legal entities from sources in Russia are
subject to withholding of profits tax at source provided
that profits are not earned through a PE of a foreign
legal entity (in the latter case, income is taxed via
the PE). Any other income received by foreign legal
entities that do not have PEs in Russia is not subject
to withholding tax. Unless lower treaty rates apply,
the domestic withholding rate for dividends is 15%.
Other income earned by a foreign legal entity, including
interest3, income from intellectual property, such as
royalties, copyrights, licenses, rentals, gains on the
sale of immovable property and shares and other
types of income listed in the tax code (excluding freight
income, which is taxed at 10%) from sources in the
3 Except for interest on certain types of state and municipal bonds
which may be taxed at 15%, 9% or 0%.
territory of the Russian Federation is taxed at 20%.
To enjoy double taxation treaty benefits, a foreign legal
entity must provide a Russian tax agent (a company
paying income) with a residence certificate from tax or
other competent authorities.
The Russian tax authorities recognize treaties made
with the former USSR until renegotiated by the
Russian government. The tax treaty network is being
continuously updated.
8.2.9 Tax administration
8.2.9.1 Returns and payments
Legal entities may choose between two profits tax
payment systems: quarterly assessment of tax with
monthly advance payments or monthly payment of
tax on actual profit. Entities with average quarterly
revenues of less than RUB 10 million (calculated on
the basis of revenue generated in the preceding four
quarters), organisations financed from the Russian
budget, PEs of foreign legal entities, and some other
organisations may apply a quarterly assessment
system which implies quarterly payments and does
not require monthly payments. The method chosen
must be applied consistently through a calendar year.
8.2.9.2 Filing
Annual declaration must be filed by 28 March of a
year following the end of the reporting year. Interim
declarations (quarterly or monthly) must be filed
within 28 days following the end of a reporting period.
Same deadlines apply to payment of profits tax. Foreign
companies operating through PE are required to
submit returns by 28 March of a year following the
calendar year. Because of the regional tax systems,
companies are required to file tax returns in each
place where they conduct business.
8.3 Other corporate taxes
8.3.1 Property tax
Fixed assets (both movable and immovable property)
owned by Russian legal entities and foreign legal
entities acting through a PE are subject to property
tax charged on book value of the assets. Foreign
legal entities having no PE in Russia are subject to
property tax in respect of immovable property located
in Russia. In the latter case the tax is calculated based
on inventory value of the immovable property. Tax rates
are established by regional authorities and may not
exceed 2.2%. The rates may vary depending on types
of taxpayers and/or property.
Land is exempted from property tax and is subject to
land tax instead (please refer to Item 6.11 above).
8.3.2 Transport tax
Transport tax is imposed on cars, motorcycles, buses,
vans, planes, helicopters, yachts, boats, ships, and
other water, air, and land transport registered in the
name of a legal entity (either Russian or foreign) in
the territory of the Russian Federation. Fixed rates
per unit of horsepower, gross ton, vehicle depend on
engine volume, gross tonnage and type of the vehicle
apply, and may be increased or decreased up to 10
times by regional authorities. The tax rate may also
31
depend on ecological class of a vehicle and/or year of
its manufacturing.
8.4 Individual taxation
8.4.1 Territoriality and residence
Russian tax residents and non-Russian tax residents
have obligation to pay personal income tax. Russian
residents are taxed on total worldwide income received
in a calendar year, while non-residents are taxed on
income received from sources in Russia.
Some tax treaties provide for periods of exemption
from Russian taxation of Russian-source income
received by non-residents. Consequently, it is important
to check the details of any applicable tax treaty before
commencing work in Russia.
Income from Russian sources includes income
received from property located in Russia, dividends
received from Russian legal entities, remuneration
for activity performed in Russia (also if it is paid by a
foreign legal entity from abroad).
An individual is a Russian tax resident if he/she
spends 183 days or more in Russia during a period of
12 consecutive months. Days of arrival in Russia are
considered days spent in Russia, and days of departure
from Russia are counted as days spent in Russia.
Letters from the Russian Ministry of Finance imply,
however, that the “final” tax residence status of an
individual taxpayer is determined by counting the
number of days spent in Russia within the relevant
fiscal year (calendar year).
To benefit from the 13% resident rate a taxpayer must
spend at least 183 days in Russia in a given calendar
year. The new residence rules essentially affect only
tax agents and bring them additional complications
because employees’ movements must be tracked to
ensure that the correct withholding tax rate is applied.
8.4.2 Gross income
8.4.2.1 Employment income
Income from employment received in the course of a
calendar year is subject to personal income tax. Income
includes all earnings, bonuses and other forms of
payment or remuneration in cash or in kind. Statutory
compensation payments are not subject to personal
income tax within the established limits. However,
taxable income of expatriates includes allowances
paid to them for living in Russia and compensation for
school fees, food, travelling expenses incurred by them
and their families on holidays and expenses for other
non-business purposes. Benefits in kind are taxed at
their monetary equivalent (market price).
8.4.2.2 Capital gains
A special tax rate for capital gains does not exist.
Instead, gains from sale of assets are subject to income
tax at the regular rate. The taxable amount is calculated
as a difference between sale proceeds and historical
cost; certain statutory exemptions apply. Taxation of
transactions with listed securities is subject to special
rules.
32
8.4.2.3 Other taxable income
Other types of income taxable in Russia include interest
from deposits, dividends on shares, income from
leasing property, royalties and certain other income.
8.4.2.4 Non-taxable income
Certain types of income are not taxable, such as
severance payments upon dismissal (within the limit
of three average monthly salaries), business travel
expenses within established limits and, in some limited
circumstances, reimbursement by an employer
of expenses arising from a work-related change of
domicile.
8.4.3 Deductions
Individuals are entitled to make deductions for the
purposes of taxation. Such deductions include certain
non-business expenses (donations to qualifying
charities and once-in-a-lifetime deduction for
acquisition of residential real estate within the set
limit) and certain personal allowances.
8.4.4 Tax credits
Residents of Russia are entitled to a tax credit against
their Russian tax liability if provided by a relevant
double taxation treaty. The credit cannot exceed tax
payable in Russia.
8.4.5 Tax rates
Income tax is payable in rubles at the rates applicable
to certain income categories.
Income in foreign currency is converted into rubles at
the exchange rate of the Central Bank of Russia on the
date the amount is received. The flat tax rate is 13%
for all types of income received by residents, except
the following:
1. Dividends received by tax residents are taxed at 9%.
A special offset mechanism applies to dividends paid
out by group companies to its shareholders.
2. A tax rate of 35% applies to the following types of
income:
• Awards and prizes received during contests,
games, and other events conducted for the purpose
of advertising goods, work, and services, in excess
of the set limits.
• Interest on deposits with Russian banks in excess
of the amount calculated using the central bank’s
current interest rate plus five percentage points
for ruble deposits during the interest-accrual
period and 9% annual interest on foreign currency
deposits.
• The difference between interest paid on all loans
and a notional interest amount calculated with
reference to a benchmark rate set by the tax code.
• Certain types of income paid by credit consumer
cooperatives and agricultural credit consumer
cooperatives.
Income received by individuals that are non-residents
of the Russian Federation is taxed at a rate of 30%,
save for dividends that are subject to a flat rate of 15%
and employment payments to so-called highly-qualified
specialists and household workers that are subject to
a flat rate of 13%.
8.4.6 Exchange rates
For tax calculation purposes, foreign income is
translated into rubles at the exchange rate quoted by
the Central Bank of the Russia on the date income is
received.
8.4.7 Tax administration: Returns and payment
Tax on employment earnings and certain other
payments must be withheld at source by the entity
making the payment. This includes tax on income from
the performance of services under civil law contracts.
Individuals receiving income from non-Russian
sources and some other types of income on which tax
is not withheld at source have a duty to report taxable
income and pay tax.
Income must be reported no later than on 30 April of
the year following the reporting year. Tax payments
are generally due no later than on 15 July of the year
following the reporting year. Payment must be made
in cash or from the taxpayer’s personal ruble account
with a Russian bank. Tax payments from abroad in
a foreign currency are not permitted. Tax overpaid
may, at the taxpayer’s request, be either refunded or
credited against future liabilities.
The actual income received during a stay in Russia
must be reported one month prior to permanent
departure from Russia. Joint returns with a husband
or wife are not permitted. There is no provision for a
taxable year other than the calendar year.
8.4.8 Other taxes and contributions
8.4.8.1 Social insurance contributions
Employers are subject to mandatory social insurance
contributions payable to the pension fund, the social
insurance fund and the mandatory medical insurance
funds. Insurance contributions are not deemed
taxes, although they are charged according to the
same principles as a formerly existing unified social
tax which they replaced in 2010. Hence, they are
administrated separately by the pension fund and the
social insurance fund (not by tax authorities).
1. All Russian and foreign legal entities registered in
Russia are required to pay insurance contributions
for their employees and individual contractors.
Insurance contributions are calculated on the basis
of remuneration, bonuses, and other income paid in
cash or in kind by an employer in favour of employees,
as well as remuneration paid under civil law contracts
for provision of works/services and copyright
agreements. The amount payable is calculated for each
individual. Insurance contributions are the liability of
the employer only. Employees are not liable to make
any social insurance contributions.
The maximum total rate of social insurance
contributions is 30%, which is split between
contributions to the social insurance fund, pension fun
and medical insurance fund. As from 1 January 2016,
the maximum rates apply to the amount of up to RUB
718’000 per year (in relation to the social insurance
fund) and RUB 796’000 per year (in relation to the
pension fund) in respect of each individual (this amount
is subject to indexation by the Russian Government
every year). Reduced rates apply to those employers
which meet certain criteria.
Payment of insurance contributions in respect of nonRussian nationals depends on their migration status.
Insurance contributions for non-Russian nationals
who permanently4 or temporarily5 reside in Russia
are payable in accordance with the rates above.
Insurance contributions on payments to non-Russian
nationals who temporarily stay6 in Russia (except for so
called highly-qualified specialists), i.e., those who have
an employment agreement for the period exceeding six
months, are payable to the Russian Pension Fund at
22% (a rate of 10% applies to the amounts exceeding
RUB 796’000 per year).
2. Statutory accident insurance – employers must
contribute to an insurance scheme covering accidents
at work and work-related diseases. The rate of this
contribution varies from 0.2% to 8.5% of the payroll
fund, depending on the type of activity of the employer.
8.4.8.2 Property tax on individuals
Property tax is imposed on real estate located in Russia
and owned by Russian and non-Russian citizens. The
tax applies to buildings, houses, flats and other real
estate. The tax rate (0.1%, 2% or 0.5% of value of the
property) depends on the type of property, its price and
several other criteria. The value of the property for the
tax purposes is a so-called inventory value multiplied
by the established deflation coefficient and it is usually
lower than market value. The tax rate can be decreased
to 0 or increased no more than 3 times by regional
authorities.
8.4.8.3 Transport tax
Transport tax is imposed on cars, motorcycles, buses,
vans, planes, helicopters, yachts, boats, ships, and
other water, air, and land transport registered in Russia
and owned by Russian and non-Russian individuals.
Fixed rates per unit of horsepower, gross ton, or unit of
transport differentiated on the basis of engine capacity,
gross tonnage and type of transport apply, and may be
increased or decreased by regional authorities up to
10 times. The tax rate may also depend on ecological
class of a vehicle and/or year of its manufacturing.
8.5 Value added tax
The VAT system, while not originally based on the
EU model system, is gradually moving towards it.
VAT applies to the value added by each element in
the chain of production from producer to consumer.
The standard rate is 18% (with a lower rate of 10%
applying to certain basic foodstuffs, children’s clothing,
4 An individual is deemed permanently residing in Russia if he has
obtained a residence card.
5 An individual is deemed temporarily residing in Russia if he has
obtained a residence permit.
6 An individual is deemed temporarily staying in Russia if he has
obtained a visa.
33
drugs and medical goods, and printed publications).
The same VAT rates apply to goods imported into the
territory of Russia. Exports are taxed at a zero rate.
mechanism, Russian VAT paid at import of supplies and
on domestically acquired supplies only by registering
for taxes in Russia. No special VAT registration applies.
Taxpayers (except taxpayers selling excisable goods,
importing goods or participating in Skolkovo projects7)
can be exempt from VAT if sales proceeds for the
three preceding months do not exceed RUB 2 million
(excluding VAT).
Furthermore, EU-type of place-of-supply rules exist
for determining where services are supplied for VAT
purposes. These rules divide services into different
categories. For example, certain services are supplied
at the place of performance, some at the location of the
“buyer” of the services, and others at the location of
certain property.
The list of exempt goods and services includes
basic banking and insurance services, securities,
participatory shares in limited liability companies,
educational services by certified establishments,
certain vitally important medical equipment, a range
of domestic passenger transport services, and certain
other socially important services. Accredited offices
of foreign legal entities may be exempt from VAT on
property rental payments when they act as lessees.
Similarly, citizens of accredited states may also benefit
from the VAT exemption that applies to property
rented by them. Most exemptions from VAT carry no
right to input credit in Russia. Instead, input VAT may
be deductible for profits tax purposes.
Most taxpayers apply an EU-type input-output VAT
system, under which VAT payers add VAT to their selling
prices and deduct VAT added to costs of inventory and
related expenses. VAT is calculated on an accrual basis
only.
While VAT on inventory and services acquired can
generally be reclaimed at purchase and documented
by a VAT invoice, VAT on a fixed asset acquired also
requires that the asset be booked in the taxpayers
accounts. Input VAT related to capital construction
is generally recoverable in accordance with the
general input VAT recovery rules (the performance
of construction works for own consumption is also
taxable).
Exports of goods to destinations outside Russia,
transport, international passenger transport, sales to
diplomatic functions, and certain other transactions
are zero-rated with a right to offset input VAT. To apply
the zero rate and achieve input credit for exported
goods, presentation of proof of actual export is
required. A significant volume of documents have to
be submitted to the tax authorities within 180 days to
confirm application of the zero rate.
Russian VAT legislation also provides for a reversecharge mechanism. With this mechanism, a Russian
entity is required to account for VAT on any payment
it makes to a non-tax-registered foreign entity if the
payment is connected to the sale of goods (works
and services) supplied on the territory of the Russian
Federation. VAT falls due to the state budget on the day
the taxpayer pays the foreign supplier for the supply.
The VAT withheld may be considered an input VAT
credit to the Russian taxpayer subject to the regular
rules for input VAT recovery. A foreign supplier may
offset Russian VAT paid through the reverse-charge
7 Skolkovo projects – R&D and innovation projects implemented within
the borders of so-called innovation center Skolkovo.
34
All Russian-registered taxpayers that are providers
of goods and services issue VAT invoices for VAT
purposes. A standard-format invoice must be issued
within five days of the supply of goods (services). The
duplicate copy of the invoice is registered in a sales
journal, and incoming invoices are to be recorded in
a purchase book. According to the recent legislative
changes, taxpayers may also use VAT invoices in an
electronic form. Gradually, electronic VAT invoices
shall replace the old paper form. However, electronic
VAT invoices still need to be physically printed
and delivered to a counterparty, since a number of
regulatory procedures and practical arrangements
needed for circulation of electronic VAT invoices
are still not in place. Compliance with invoicing and
accounting procedures is critical to the supplier’s
ability to recover input VAT.
Quarterly filing of VAT returns is mandatory. Any
amount due on the return filed is payable in three
equal installments on the 25th day of each of the three
months following the return period. Foreign entities,
having several branches in the Russian Federation,
choose the branch through which they will file returns
and pay tax for all branches.
Import VAT
A limited range of goods is exempt from import VAT.
The list of such goods includes humanitarian aid and
goods designated for the diplomatic corps. Exemption
from import VAT is available on a range of technological
equipment (including their components and spare
parts) analogues of which are not produced in Russia.
List of such equipment is approved by Russian
government.
Controlled foreign companies
In November 2014 the Russian Tax Code was
amended with new provisions regarding taxation of
foreign companies in the Russian Federation and a
concept of controlled foreign companies (CFC). These
amendments came into effect as of 1 January 2015.
A CFC means a foreign organization which meets
all of the following criteria: (i) it is not a Russian tax
resident; and (ii) it is controlled by Russian residents,
either individuals or legal entities (the Russian Tax
Code further specifies the definition of such control).
Russian tax residents who control CFC must notify the
tax authorities of the existence of a CFC and the size of
its interest in the CFC if it exceeds 10%. Certain other
reporting and tax procedures apply.
Chapter 9
banking system to rise to 14%-16% over the next 12
months, from an estimated 11% as of year-end 2015.
Banking environment
Participation of foreign capital in the Russian
banking sector currently accounts for 16.7% (where
foreign capital has control) of the total capital as of 1
January 2016 and 14% of the total assets. During
Soviet times, foreign banks were only permitted to
open representative offices. When the liberalisation
process started in the late 1980s, some of these
representative offices were transferred into subsidiary
banks. As of 1 January 2016, there were 106 foreigncontrolled banks operating in Russia, of which 68
banks have 100% foreign capital participation. The
largest foreign-owned banks are UniCredit, Raiffeisen,
Rosbank (Societe Generale group) and Citibank.
9
9.1 Overview
Despite good potential and years of high growth, the
Russian banking sector remains relatively small with
total assets of about 77 trillion RUB or more than
100% of nominal GDP (2015). The total assets of the
banking system have been increased by 6% in 2015.
But the total capital has been increased by higher pace
(13.7%). The total number of operating banks is 718
(1 March 2016), many of them are very small, though
about 183 banks have capital exceeding USD 30
million.
The banking system in Russia developed rapidly
starting from 1990. At the beginning of 1992 about
1500 banking licenses were issued. Bank registrations
totalled 2500 at the peak of the sector’s expansion in
1996 when for enterprises and organisations it was
popular to establish their own banks. The sector has
gone through a substantial transformation since then.
Many banks defaulted on their obligations and went into
bankruptcy. The number of banks has decreased even
further as a result of insufficient liquidity, tightened
capital, anti-money laundering or other regulations.
The number of banks was decreased by 110 in 2015.
The sector is concentrated and controlled by state
banks: 54% of the total banking assets and about
half of the total capital belongs to the 5 largest banks,
4 of which are state-controlled (Sberbank, VTB,
Gazprombank, Russian Agricultural Bank) and one is a
private bank (Alfa Bank, 3rd place in terms of capital as
of 1 February 2016). Sberbank, with 27% of the total
banking assets and about a quarter of the total capital,
plays a dominant role, especially in retail deposits
(more than 50% of the market) and about a third of the
lending market. The state directly or indirectly keeps
control over more than 20 other banks, including
several relatively large banks which were rescued
during 2008 - 2009 financial crisis.
The sector is under increasing pressure as Russian
economy is in contraction mode and foreign funding
is limited due to Western sanction. According to Fitch
Ratings’ March 2016 report, “Russian banks’ capital
ratios and loan performance to bear the brunt of the
country’s falling currency and economic contraction.
We also envisage a detrimental impact on bank
profitability as rising problem loans will likely lead to
higher loan-loss provisioning expenses for banks.”
The Russian economy has been contracted by 4% real
GDP for 2015 and Moody’s forecasts further GDP
contraction of at least 2% in 2016.
Moody’s expects Russian banks’ capital buffers to fall
as a result of currency depreciation. Close to a third
of the banking sector’s loan book is denominated in
foreign currency and the falling ruble will likely inflate
the value of these loans in the calculation of riskweighted assets pushing it higher and, consequently,
capital ratios lower. The rating agency estimates the
stock of nonperforming and impaired loans in the
Russia’s banking system, despite its recent expansion,
is still relatively underdeveloped, but this also creates
some scope for the financial deepening process in the
country and investment opportunities in this area.
9.2 The Central Bank
Background
The Central Bank of the Russian Federation (the “Bank
of Russia” or “CBR”) was founded in 1990 and operates
in accordance with the Constitution of the Russian
Federation and the Federal Law on the Central Bank
of the Russian Federation (Bank of Russia). In 1991
it substituted Gosbank, the former State Bank of the
USSR, which allocated funds from the state budget.
Responsibilities
The CBR is responsible for monetary and exchange
rate policies, the stability of the banking system and
the financial market. The principal function of the
CBR is to protect the stability of the Russian ruble.
The CBR also supervises the Russian banking sector
and has the role of financial supervisory authority.
This supervisory function is rather uncommon among
central banks in Europe.
The CBR is also maintaining the biggest clearing
network in Russia with every Russian bank keeping
correspondent accounts with respective regional CBR
clearing centre.
Exchange rate policy
Since November 2014 the Bank of Russia conducts FX
policy under managed floating exchange rate regime.
This implies that the CBR does not prevent market
trends in dynamics of the ruble exchange rate, which
are induced by macroeconomic fundamentals,
meanwhile smoothing excess volatility of the ruble
exchange rate in order to ensure gradual adaptation
of economic agents to exchange rate fluctuations. Any
fixed constraints for the level of the ruble exchange
rate or any target levels are not set.
The Bank of Russia uses the ruble value of the dualcurrency basket consisting of 45 eurocents and 55
USD cents as the operational indicator for FX policy
implementation. The floating operational band,
boundaries of which are automatically adjusted
depending on the amount of FX interventions, forms
the range of admitted values for dual-currency basket.
35
Current mechanism for smoothing exchange rate
volatility allows implementing purchases or sales
of FX currency not only on the boundaries of the band,
but also inside the band. The parameters of the CBR
FX operations on domestic market are determined
by taking into account the goal of smoothing exchange
rate volatility and also given the Federal Treasury
operations related to accumulation or expenditure of
Reserve fund and National wellbeing fund.
In December 2014 the CBR increased the key rate
by 6.5% at once from 10.5% to 17% to support ruble
but later in 2015 decreased the key rate up to 11%
in August 2015 (the rate has been changed to 14%
in March 2015, to 12.5% in May 2015, to 11.5% in
June 2015 ).
9.3 Danske Bank in Russia
Danske Russia is a highly integrated part of the Danske
Bank Group, one of the largest banks in Northern
Europe.
The Bank’s solutions and services include those most
widely used by subsidiaries of non-Russian companies
operating in Russia. The Bank offers:
• accounts in major currencies
• international and domestic payments
• credit and deposit facilities
• bank guarantees
• treasury products, including derivatives
• trade finance (import and export letters of credit,
collections, international guarantees)
• cash management solutions
• electronic banking services (including SWIFT for
corporates)
• corporate, customs cards
• currency control services.
The Bank offers deposits and loan facilities in rubles
and all other major currencies.
Most companies planning to set up a business in Russia
will find that local conditions and regulations are quite
different from those they are used to. Therefore, the
assistance of a professional financial service provider
is worth considering for companies that are planning
to enter the Russian market.
Danske Russia knows the ins and outs of Russian
business life, and can help customers set up banking
transactions that comply with local legal requirements.
The financing of activities in Russia will often be easier
if handled by a bank operating locally.
Danske Russia offers wide range of cash management,
treasury and financing products for corporate clients
of the Group with focus on Nordic and selected
36
international companies operating in Russia. From
offices in central Moscow and St. Petersburg, the
customers are offered a deep insight into the local
business environment in Russia.
See www.danskebank.ru for further information.
9.4 Legal & regulatory issues
9.4.1 Introduction
Changes to banking regulations happen often in Russia,
thus the following is general information only, and
individual case by case legal advice should be sought.
9.4.2 Resident and non-resident status
Resident organisations include legal entities,
established under Russian laws and located in Russia,
such as partnerships, limited liability and joint-stock
companies, production co-operatives, state and
municipal unitary enterprises as well as non-profit
organisations.
Non-resident organisations include foreign legal
entities, companies and other corporate associations
with a civil legal capacity set up in accordance with the
legislation of foreign states, international organisations,
their branches and representative offices set up on
the territory of the Russian Federation.
9.4.3 Account ownership
Accounts in rubles as well as in foreign currency
can be held by residents, domestically and abroad,
and non-residents that have registered with the
relevant local tax office in Russia. The tax office has
to be notified of each bank account opened with a
Russian bank. Effective from June 2005, Russian
resident companies are allowed to open accounts in
OECD and FATF countries (from January 2007 also
in other countries) without the permission of the
CBR but subject to subsequent notification to the tax
authorities.
Russia has not adopted the IBAN system.
9.4.4 Deposit insurance system
Most of the banks in Russia are covered by the Federal
Deposit Insurance System. Members of the Deposit
Insurance System have to make contributions to a
special deposit insurance fund. In case of an insurance
event, all individuals will have the right to a 100%
reimbursement of their deposits up to a maximum
amount of 1’400’000 rubles. Corporate clients of
banks are not covered by this insurance. Almost all
banks participate in this deposit insurance system.
9.4.5 Cash pooling solutions
There is no specific legislation on cash pooling and
no specific restrictions to the accounting and tax
treatment of pooling arrangements. At the same time
each arrangement requires good understanding of all
legal, tax and operational aspects.
The current state of cash pooling in Russia is as follows:
• Resident and non-resident accounts are legal.
• Most pooling variations are generally legal – but not
common practice.
• More market practise will however be needed for
cash pooling to become more widespread among
businesses, in particular as regards to cross border
pooling.
9.4.6 Account charges
Banking transaction fees are not standardised and
banks follow their own individual policies. Fees can
vary substantially depending on the relationship
between the bank and the customer as well as on the
transaction type.
9.4.7 Currency control
All transactions between Russian residents and nonresidents are subject to currency control. As a general
rule, export proceeds of Russian residents must be
repatriated to Russia, save for certain exceptions (e.g.,
if the proceeds are to be used for repayment of loans
from foreign creditors from OECD or FATF countries
with a maturity exceeding two years).
Most of the transactions between Russian residents
and non-residents must be reported to the CBR by
the Russian banks performing transfers of their
clients’ funds. Russian tax and customs authorities
may also request Russian residents to submit certain
information on cross-border transactions.
9.4.8 Money laundering prevention
Russia has implemented anti-money laundering
legislation (Law RF 115-FZ on Combating Legalisation
(Laundering) of Criminally Gained Income and Financing
of Terrorism in 2002 and article 174 of the Criminal
Code).
Russia is a Financial Action Task Force (FATF) member
and observes most of the FATF recommendations.
Russia is also a member of the Council of Europe’s
MONEYVAL Select Committee and the Eurasian
Regional Group on Combating Money Laundering and
Financing of Terrorism (EAG). Russia has established
a financial intelligence unit (FIU), the Federal Financial
Monitoring Service (FFMS).
Financial institutions in the broadest sense must record
and report suspicious transactions to the authorities
(FFMS). They must also identify their customers and
report transactions equal to or exceeding 600’000
ruble involving cash, bank deposits, precious materials,
life insurance payments, gambling and entities in
certain “high-risk” countries to the authorities.
Account
operating
procedures
require
full
identification. Correspondent relationships with
non-resident credit institutions that do not have a
physical presence in the country of incorporation are
not permitted. All foreign financial institutions must
operate solely through subsidiaries incorporated in
Russia subject to domestic supervision. Banks are
required to keep all records for at least five years after
account closing.
9.4.9 Electronic transaction regulations
A Federal Law No. 63-FZ on Electronic Signature was
adopted in 2011. This act is aimed at harmonising
regulation of the use of electronic signature with
international standards.
In some instances electronic signatures may be
used for documents submitted to the government
authorities without a physical certification by the
authorities or notaries.
Electronic banking in Russia includes information
services (account balances, payments information,
etc.), payments for utilities, money transfers, FX and
deposits.
9.5 Payments and collection
9.5.1 Introduction
Paper-based payment methods are rapidly being
replaced by electronic solutions. Electronically
processed payments represent 82%, measured by
number, and 80%, measured by value, of all domestic
payments. In the CBR payment system, this figure is
higher than 99%. Nonetheless, the importance of cash
payments is still considerable, although decreasing.
Credit transfers are the dominant payment instrument
in terms of both volume and value.
The retail credit card market in Russia is well developed,
and banks in Russia are issuing an increasing number
of credit cards. The infrastructure of the payment card
industry is fairly developed. Businesses are well aware
of the advantages of using corporate cards instead
of cash for corporate expenses. Both debit and credit
cards are used for corporate purposes and the use is
expanding rapidly.
9.5.2 Card payments
The use and issuance of payment cards have increased
steadily in recent years. The CBR Regulation of 24
December 2004, No. 266 P on the Issuance of Bank
Cards and Payment Card Operations further facilitated
expansion of the payment card market.
Both consumer and business/corporate cards are in
circulation. As of 1 January 2016 the number of cards
issued by credit institutions increased to 243 million
(138 million as of 1 January 2011), while the value of
payment card operations reached 9.7 billion.
Since the introduction of credit cards in 2001, their
popularity has continued to increase. By 2016, the
number of credit cards had increased to 29.4 million.
Cards are widely accepted in big cities in Russia. Yet at
remote locations one may find difficulties when trying
to pay with a card.
Starting from 1990s the establishment of the national
payment system has been discussed in Russia. The
Federal Law of the Russian Federation No. 161-FZ
“On the National Payment System” (the “Payment
System Act”) was adopted in 2011. Starting 1 April
2015 all domestic card transactions are processed
via the National Payment Card system. MasterCard
International and Visa International complied with
this requirement. Such changes should not be seen by
consumers or merchants.
37
In 2015 banks started to issue plastic cards of the
National Payment System.
9.5.3 Credit transfers
Payment orders (credit transfers) are the dominant
cashless commercial payment instrument in Russia in
terms of both volume and value. Credit transfers can
be paper-based or automated, but electronic credit
transfers account for the majority of transfers.
9.5.4 Direct debits, L/C’s and other means
Direct debits (payment requests), standing orders,
collection orders and ruble letters of credit account
for a very small proportion of commercial payments in
Russia.
9.5.5 Cheques
Cheques are not used in Russia as a means of
payment. Cheques are used only to withdraw cash
from corporate accounts because it is required by law.
There is no interbank cheque clearing system in
Russia.
9.6 Electronic banking
9.6.1 E-banking
Electronic banking services are offered by majority
of banks. There is currently no electronic banking
standard. Banks either offer platforms developed
by local or foreign vendors or their own proprietary
software (which usually does not feature multibank
functionality) for corporate banking purposes.
9.6.2 Other solutions
Businesses’ growing effort to streamline payment
processing is supported by a number of banks. Among
offered options are:
• Various host-to-host (H2H) solutions are available
that provide direct connectivity between the
customer’s ERP system and the bank’s processing
engine, which gives online access to accounts.
• SWIFT for corporates service is supported by
some banks allowing clients to use one channel for
all banks in different locations.
9.6.3 E-payments
Micropayments for e-commerce are offered by
domestic and global players, such as Webmoney,
Yandex.Money, E-port, Rapida, Assist, CyberPlat,
PayPal, MoneyMail. In general, such solutions rely on
two important prerequisites: (1) prepayment and (2)
settlement by cash, debit or credit card.
9.6.4 E-invoice / EBPP
No industry-wide electronic bill presentment and
payment (EBPP) solutions exist on the market, although
various providers operate in Russia.
38
Chapter 10
10
Useful Links
Danske Bank
Nordics
Europe
Baltics
Denmark
www.danskebank.com
Germany
www.danskebank.de
Estonia
www.danskebank.ee
Finland
www.danskebank.fi
Ireland
www.danskebank.ie
Latvia
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Norway
www.danskebank.no
Luxembourg
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Lithuania
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Sweden
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Northern Ireland
www.danskebank.co.uk
Poland
www.danskebank.pl
Russia
www.danskebank.ru
United Kingdom
www.danskebank.com/london
Lawyer – Consultant
Mannheimer Swartling
www.mannheimerswartling.com
Foreign embassies in Russia
Delegation of the European Union to Russia
http://eeas.europa.eu/delegations/russia/
Embassy of Lithuania in Russia
http://ru.mfa.lt
Embassy of Denmark in Russia
http://rusland.um.dk/
Embassy of Luxembourg in Russia
http://moscou.mae.lu/ru
Embassy of Estonia in Russia
www.estemb.ru
Embassy of Norway in Russia
http://www.norvegia.ru/Embassy/
Embassy of Finland in Russia
www.finland.org.ru
Embassy of Poland in Russia
http://www.moskwa.msz.gov.pl/ru/
Embassy of Germany in Russia
www.moskau.diplo.de
Embassy of Sweden in Russia
www.swedenabroad.com
Embassy of Ireland in Russia
www.embassyofireland.ru
British Embassy in Russia
http://ukinrussia.fco.gov.uk/ru/
Embassy of Latvia in Russia
www.am.gov.lv/moscow
39
Embassies of Russia abroad
Embassy of Russia in Denmark
www.denmark.mid.ru
Embassy of Russia in Lithuania
http://www.lithuania.mid.ru
Embassy of Russia in Finland
http://www.rusembassy.fi/
Embassy of Russia in Luxembourg
http://ambruslu.com/
Embassy of Russia in Estonia
http://estonia.mid.ru/
Embassy of Russia in Norway
www.norway.mid.ru
Embassy of Russia in Germany
www.russische-botschaft.de
Embassy of Russia in Poland
http://poland.mid.ru/
Embassy of Russia in Ireland
www.ireland.mid.ru
Embassy of Russia in Sweden
http://www.ryssland.se
Embassy of Russia in Latvia
www.latvia.mid.ru
Embassy of Russia in UK
www.great-britain.mid.ru
General Information
Government of the Russian Federation
www.government.ru
Association of European Businesses
www.aebrus.ru
Central Bank of the Russian Federation
www.cbr.ru
Russian Chamber of Commerce and Industry
www.tpprf.ru
Ministry of Finance
www.minfin.ru
Moscow Exchange
http://moex.com/
Ministry of Economic Development and Trade
www.economy.gov.ru
Confederation of Danish Industry (DI)
Representative Office in Moscow
www.di.dk/dibd/globalekontorer/rusland
Federal State Statistics Service
www.gks.ru
Finnish-Russian Chamber of Commerce
www.svkk.ru
Association of Russian Banks
www.arb.ru
The Swedish Trade & Invest Council
www.business-sweden.se
40
Danske Bank
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Denmark
Tel.: +45 33 44 00 00
www.danskebank.com
SWIFT: DABADKKK
Danske Bank Russia
St. Petersburg Office
Marata Street 69-71 A
191119 St. Petersburg, Russia
Tel.: +7 812 319 45 00
Moscow Office
Business Center Citydel, 4th floor
Zemlyanoy val 9
105064 Moscow, Russia
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www.danskebank.ru
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Mannheimer Swartling
Norrlandsgatan 21
Box 1711
111 87 Stockholm
www.mannheimerswartling.com
Moscow Office
Romanov Dvor Buisness Centre
4 Romanov per.
125009 Moscow, Russia
Tel.: +7 495 380 32 80